If you are self-employed and planning to buy a home, you have to go through the same mortgage application process as anyone else. However, there are some differences lenders consider when you are self-employed. They still look at your credit score, debt, assets, and income, but verifying your income is slightly different.

When you work for someone else, lenders can go to your employer to confirm your income and how likely you will continue earning it. But if you're self-employed, you must provide documentation to prove your income is stable and reliable.

 

Cons of Getting a Mortgage While Self-Employed

When you work for yourself and want to buy a house, it can be harder to get a home loan. Banks often prefer to lend to people with regular jobs because their income is easier to verify. If you're self-employed, you'll need to provide more proof of your income, which can be a hassle. 

Another issue is that when you're self-employed, you can deduct business expenses on your taxes, which reduces your taxable income. However, when you apply for a mortgage, the bank looks at your income before deductions. This means that even if you make a good amount of money, your income on paper might not look as high as it actually is. This can make it harder to qualify for a loan or to get a loan for as much as you want.

Lastly, banks might require you to make a bigger down payment if you're self-employed. This means that you'll need to have more money saved up to buy a house.

 

How To Qualify For A Mortgage If You Are Self-Employed

If you're self-employed, getting a mortgage can be a little tricky. But don't worry. It just takes a little organization and preparation. Here's a quick guide to help you understand what you need to know and how to get ready.

 

Factors Mortgage Lenders Look For

Lenders typically require evidence of several factors in order to consider you for a mortgage:

• Stability of Income
• The type and location of your self-employment
• Your business's financial strength
• Your business's ability to generate sufficient income in the future

 

Documents You Need To Provide

In order to begin the home-buying process, you'll need to show that you have a steady stream of income from self-employment, which should ideally be consistent for at least two years. To prove this to your lender, you'll typically be asked to provide some documents. Here are a few examples of the kind of documents your lender might request:

 

For Employment Verification

To show that you are self-employed, you may need to provide employment verification. This can come in the form of letters or emails from the following:

• Your current clients
• A licensed certified personal accountant (CPA)
• A professional organization that confirms your membership
• Any state or business license that you possess
• Evidence of your business's insurance
• A Doing Business As (DBA) statement

 

For Income Documentation

If you want to secure a mortgage, it's important to have proof of reliable income. Even your past earnings can affect your loan eligibility, so keep that in mind. Your lender may request the following documents:

• Your personal tax returns (including your W-2s if you’re paid through your corporation)
• Depending on your business structure, you might need to provide a Schedule C, Form 1120S, or K-1 as part of your profit and loss statements
• Monthly or quarterly bank statements that help your lender verify that you have enough funds to cover a down payment

 

If you're self-employed for less than two years, don't worry. You're still eligible to get a mortgage for your home. However, your business must be active for at least 12 consecutive months, and your lender will verify your employment history for the past two years, including any non-self-employment. 

To make sure that your business is stable, your lender will go through your training and education in detail. They want to make sure that your business has a good track record and can continue to do well in the future..

 

Make Yourself A Desirable Mortgage Candidate

Self-employed borrowers who can make the payments on a home loan can improve their chances of getting a mortgage by doing some or all of the following:

 

Improve Your Debt-to-Income Ratio (DTI)

If you're self-employed and looking to get a mortgage, having a good debt-to-income ratio (DTI) is important. This means you should try to have as little debt as possible and as much income as possible. To improve your DTI, you can try to increase your income or reduce your debt.

One way to do this is to look for a home that's less expensive than what you can afford. For example, if a mortgage calculator says you can afford a $600,000 home, try to find one that costs $450,000 or less. This will give you more money to invest in your retirement savings and make you more likely to be approved for a mortgage.

 

Develop A Self-Employment Track Record

Developing a track record of successful self-employment can increase your chances of getting approved for a mortgage. Lenders want to see that you know how to manage your business finances effectively. It's recommended that you have at least two years of self-employment history, which can be documented through your tax records. This will demonstrate your ability to consistently generate income and manage your expenses.

 

Maximize Your Credit Score

Having a higher credit score can give you an advantage when you are applying for a loan. It increases your chances of being approved and allows you to access more favorable interest rates.

 

Offer A Significant Amount of Money Upfront

Putting a lot of cash into the purchase of a home upfront increases the equity in the home and decreases the likelihood that a borrower will walk away from it during times of financial strain. This makes the borrower less of a risk in the eyes of the bank and can lead to more favorable loan terms.

 

Maintain A Substantial Cash Reserve

Aside from making a large down payment, having a substantial emergency fund can demonstrate to lenders that you are capable of continuing to make your monthly housing payments, even if your finances take a turn for the worse. It is recommended to build up your savings to cover expenses such as property taxes, homeowners insurance, and any necessary repairs and maintenance.

 

Separate business and personal Expenses

To present a favorable profile on your application, it is advisable to separate your business and personal expenses. Charging business purchases to your personal card may increase your credit utilization and negatively impact your application. To avoid this, create separate accounts and credit cards for your business and personal expenses.

 

Summary

Getting a mortgage while self-employed requires more paperwork and documentation than traditional employees. Lenders will want proof of income stability and the financial strength of your business. To increase your chances of getting approved for a self-employed mortgage, you can optimize your debt-to-income ratio, develop a self-employment track record, and max out your credit score. With these factors in mind, you can prepare and qualify for a mortgage that fits your needs as a self-employed borrower.