You can get a mortgage if you’re self-employed and want to buy a house, but you’ll have to fill out a lot of paperwork.
The lack of a W-2 or a recent paycheck can make it difficult to get approved for a mortgage from a lender.
Borrowers who are self-employed must be able to show proof of an active source of income, such as the money they make from their job.
Even though mortgage lenders tightened credit standards during the coronavirus crisis, senior loan officers from the Federal Reserve reported that banks began easing standards for household loans in 2021. There are a few additional application items that self-employed applicants should expect because 2020 was an unusual year for businesses.
Does Being Self-Employed Make It Difficult to Get a Mortgage?
Getting a mortgage as a self-employed person can be more difficult than getting a loan as an employee with a W-2. Because revenue can fluctuate, lenders will need to take your company’s stability and viability into account when extending you a line of credit.
In general, lenders are concerned about the ability of all borrowers, including self-employed individuals, to consistently pay back their loans. In order to get a mortgage, they’ll need proof of a steady income, a long-term outlook for it, and that you’ve paid your debts on time in the past.
Proof of work, payments, and activity supporting business operations, such as a company website, is required to demonstrate the stability of your business.
Prospective homeowners typically need two years of self-employment income in order to be considered for a mortgage. Borrowers with just one year of self-employment experience may still be eligible for a loan if they meet other requirements, such as having worked in the same or a higher-paying job in the past.
When You’re Self-Employed, How Do You Get Approved for a Mortgage?
You must prove to the lender that you will be able to pay back the loan over its entire term if you are self-employed in order to qualify for a mortgage.
Here’s what self-employed mortgage applicants should bring to the table for the attention of lenders:
Income that remains the same or rises
It is acceptable to have a little fluctuation in your tax returns, but lenders prefer to see two full years’ worth of returns.
When crunching the numbers, lenders are looking for the worst-case scenario, so the lower of the two years is likely to be taken into account. Be aware that a significant drop in income from year to year may raise additional questions during the underwriting process because the lender may see that as a sign that your business is in decline.
Consistently Doing the Same Things
Two years of self-employment income from the same industry is ideal. Some lenders will make an exception if you have one year of self-employment tax returns and W-2s from an employer in the same field if you’re just starting out as an entrepreneur.
If you’ve only been self-employed for a short time, lenders may be less confident in your ability to maintain a steady income stream.
Having a history of repaying your debts is a must. There is a higher risk for the lender when there are foreclosures and delinquencies, collections, repossessions, and bankruptcy cases.
Your revolving credit accounts, as well as how frequently you’ve applied for credit in the past year, will be examined by lenders.
Paying Off Debt at a Fast Pace
Debt-to-income ratio – the percentage of your monthly income that goes toward debt repayment – typically falls between 43 and 45 percent. You may not be eligible for a mortgage or receive an offer to buy a home if your debt payments are deemed unmanageable based on your income.
If you’re self-employed and take a lot of business expenses as tax deductions, you’ll want to be extra cautious. Mortgage underwriters typically look at income after expenses, and this can make it more difficult to qualify for a loan.
Even if you’ve lost your job, you still have to make your mortgage payment each month. Some lenders may require proof that you’ve set aside money for rainy days in case your income drops.
A Huge Down payment
A substantial down payment – some lenders now expect at least 20% – can give lenders more assurance. For the most part, the down payment requirements for self-employed borrowers with good credit and a sufficient income are the same as those for all other types of consumers.
Documents Required for Self-Employed Individuals
A mortgage application will not be considered complete unless the borrower provides all of the required financial documentation to the lender. If you’re self-employed, you’ll have to provide both your business and personal financial records when applying for jobs.
Lenders are taking additional steps to verify income due to the coronavirus pandemic. Early in the mortgage process, many lenders will ask for proof of income, and then again at the time of closing.
Regardless of which lender you choose, you should be prepared to submit the following:
- Identification that is issued by the government
- For the next two years, file individual tax returns.
- A two-year period of business taxes
- Form 4506-T of the Internal Revenue Service, granting access to your tax records to third parties
- A statement of earnings
- A bank statement from both a business and personal account
- Investment or retirement account statements are examples of asset account statements.
- Verification of a company’s name, such as a DBA (doing business as) license.
- Canceled rent or mortgage checks list of your debts and expenses, both personal and business
- Social Security or disability benefits or any other source of extra income
Some lenders may require additional documentation, such as financial statements from your accountant and clients, to secure a loan.
Make sure your documents are current and well-organized before submitting them. To avoid having to re-interview you, lenders do not want to have to re-interview you. Make it easy for the lender to understand your finances.