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What the Self-Employed Need to Know Before Applying for a Mortgage

While self-employed borrowers fill out the same mortgage loan application as everyone else, you may have to jump through a few extra hoops. Keep reading to learn more about what documentation to provide, some tips on how to become a more attractive candidate and more!

What to Know Before Applying

The hardest part of applying for a mortgage as a self-employed borrower is proving your income. A common problem for self-employed borrowers is they use business expenses to reduce their taxable income. This can make lenders question if they can afford a home.

Conventional loans, FHA loans, and bank statement loans are all possible mortgage options for the self-employed. Borrowers can also take out a joint mortgage or enlist a cosigner, which can be helpful options when struggling to prove income.

How To Know If You Are Self-Employed

A lender will likely consider you self-employed if any of the following apply to you:

  • You own 25% or more of a business.
  • You do not receive W-2 tax forms
  • You receive 1099 tax forms
  • You are a contractor or freelancer
  • At least 25% of your income is from self-employment
  • Most of your income is from dividends and interest

Things To Do To Become a More Attractive Candidate

Increase your credit score. The higher credit score the better. This makes you more attractive to lenders and qualifies you for a lower interest rate.

Show that you have been successful at being self-employed. This shows that you have been successful in the past and can keep a stable income. A stable income helps show that you can make your mortgage payments timely.

Offer a large down payment. The more equity in a home, the less likely the lender will think you will walk away from it. The lender will see the borrower as less of a risk if they put a large down payment upfront.

Have a large emergency savings. A large emergency savings shows the lender that if the business struggles at times you will still have enough to keep making monthly payments.

Pay off all consumer debt prior. The less monthly debt payments you have, the easier it will be to make a mortgage payment. This includes paying off credit cards and car loans. Having less debt could help you qualify for a higher loan amount because you’ll have a higher cash flow.

Providing Documentation

Self-employed borrowers need to be prepared to provide more paperwork to document income compared to traditional employees who can produce a W-2.

Below is a list of documents you may need to provide when applying for a mortgage. When applying, check with your financial institution what documentation they specifically need.

  • List of debts and monthly payments
  • Bank statements
  • List of assets (savings accounts, investment accounts, etc.)
  • Additional sources of income (alimony, social security, etc.)
  • Proof of your business or employment (business license, letters from clients, statement from your accountant, etc.)
  • Personal tax returns (at least two years of tax returns as business for self)
  • Business tax returns
  • Year to date Profit & Loss statement

 

 

Sources:

https://www.investopedia.com/articles/mortgages-real-estate/08/self-employed-mortgage.asp

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