Qualifying for a Mortgage When You're Self-Employed
Posted by Eric Skates on
Applying for a mortgage can be a daunting task, especially if you are self-employed. Unlike employees in traditional jobs with steady paychecks, self-employed people often find their income fluctuating throughout the year, which can make it challenging to qualify for a mortgage. However, it's certainly not impossible.
What Mortgage Lenders Look For
If you're self-employed, here are some of the factors that mortgage lenders will take into account.
Your Credit Score
A good credit score is critical when you're applying for a mortgage, especially if you are self-employed. Before you apply, review your credit report and dispute anything that is incorrect. Avoid applying for new credit cards or new loans for a few months before you start a mortgage application. Too many new inquiries may lower your credit score.
Consistent Work and Steady Income
Most lenders want applicants to have at least two years of self-employment in the same field. One year of self-employment income might be sufficient if you can also provide a W-2 from an employer in the same industry.
Cash In Savings
Lenders want to know that you'll be able to make payments even if business is slow. Having a robust emergency fund will make lenders feel more comfortable extending credit to you. Try to save as much as you can before you apply for a mortgage.
Your Down Payment
If you have a high-enough income and good credit, the requirements for approval are often no different if you're self-employed. However, if your application isn't as strong, a higher down payment can often help.
Documentation
Mortgage lenders will require complete documentation to prove your income. While each lender will have different requirements, you should be prepared to provide the following documents.
- Your personal and business tax returns for the past two years
- IRS Form 4506-T, which authorizes the lender to request transcripts of tax returns
- The latest statements from your business bank account
- Your profit and loss statements and balance sheet
- Your business license
- A list of your outstanding debts and their minimum payments
Make sure that all of your documentation is current and well-organized.
Plan Ahead
If you're self-employed and you're considering buying a home within the next several years, here are some steps you can take now to make yourself a more attractive candidate.
Separate Your Business and Personal Funds
Your business should have its own bank accounts and credit cards. Keep detailed records of your income and expenses. Registering your business and holding the appropriate license shows your potential lender that you're serious about continuing.
Build Your Track Record
Again, mortgage lenders want to see a history of steady work. While it's okay for your income to fluctuate, lenders prefer it if you can show a steady increase in cash flow over time.
Watch Your Tax Deductions
If you're a business owner, tax deductions can help you to reduce your taxable income, lowering your tax bill. However, these tax deductions can actually hurt you when you're applying for a mortgage. When making approval decisions, lenders will look at your income after deductions. Claiming a lot of deductions can potentially lower your income to the point that you no longer qualify, or else qualify for a lower amount. If you plan to buy a home in the next few years, consider this when you're claiming tax deductions. Please note: If you take fewer deductions, you will probably have to pay more in taxes. Always consult your accountant about all tax deductions.
Pay Down Your Debts
Not only will reducing your debt load improve your credit score, it will also lower your debt-to-income ratio. This will make it more likely that your mortgage application will be approved.
Buying a new home is a big step for anyone. Contact Equity Prime Mortgage at (877) 255-3554 and ask about our Bank Statement Loan program or visit us online to find out how we can help. We look forward to assisting you!