Applying for a mortgage can be daunting for many borrowers, regardless of employment status. Self-employed individuals in particular face additional obstacles due to the multiple factors lenders take into account when assessing their income.
Qualification for a self-employed mortgage requires proof of steady and consistent income over the past two years. Lenders also want to see cash reserves that can cover months when your income drops below normal levels.
As a self-employed borrower, lenders typically look for steady income, cash flow and an effective business plan when applying for a mortgage. You may qualify for the same programs and interest rates as wage earners but may need more documentation than someone with a W-2 employee would need.
When applying for a traditional mortgage loan, lenders typically request tax returns and other financial documents that demonstrate your cash flow over time. If you are self-employed, however, this task may prove particularly challenging since income can be unpredictable.
Some self employed borrowers get around this issue by using a type of mortgage known as a bank statement loan, which qualifies you based on the total funds coming into your bank rather than income tax returns. Unfortunately, this loan type is considered non-qualified (non-QM), lacking some consumer protections offered by mainstream loan programs and having higher interest rates.
If you are self-employed, the lender will require at least two years of tax returns to verify your employment income. This helps them determine if there is a reliable source of revenue that can support monthly mortgage payments throughout the duration of your loan term.
The lender may also look at your adjusted gross income, which is the amount of net profit left after deducting expenses. This number may be lower than actual gross income since self-employed borrowers often take many write-offs which reduce taxable earnings.
Some lenders require you to supply a year-to-date profit and loss statement or bank statements, as well as your tax returns which detail business earnings. If there has been an unusual pattern of high income fluctuations, several years’ worth of tax returns may be needed along with an explanation from your accountant.
In addition to your tax returns, the lender may also request you fill out Form 4506-T which gives them authorization to obtain IRS transcripts. This is done to guarantee the information on your application matches what’s stored in the IRS database.
Lenders want to ensure you have the financial capacity to purchase a home and make regular mortgage payments, so they will review your credit score, debt-to-income ratio (DTI), assets and business bank statements. They may also request copies of your business bank statements in order to confirm how much money is in the bank.
The good news is that lenders are now more willing to provide self-employed borrowers with mortgages with the same features and low interest rates as mainstream borrowers. All it takes is some effort and research to find the perfect loan program and lender – it could be done! Utilizing a mortgage calculator will give you an accurate assessment of your financial situation so you can find the most suitable match for you. The next step should be organizing yourself financially so you can save for down payment and closing costs; though this may seem daunting at first glance, working with a mortgage professional could make this task much simpler for everyone involved!
If you’re self-employed, your credit score is an important factor when applying for mortgage lenders. A good score demonstrates that you have a history of timely debt repayment and minimal credit utilization.
A higher credit score can also open the door to a better interest rate on your loan, especially if you’re seeking out larger mortgage amounts than what someone with a lower credit score can obtain.
Lenders typically require two years of steady, reliable income to qualify for a mortgage. However, lenders can be flexible if you’re just starting out in business and possess other professional credentials to prove your employment status.
Most lenders use tax returns to calculate income; however, it may be possible to qualify for a loan based on your bank statements instead. While this option may be harder to locate and come with a higher interest rate, those needing more flexibility may find this option appealing.