Self Employment Mortgages Brent Boltz Mission Realty Group
How You Can Get a Self-Employed Mortgage Loan
If you’re self-employed, you probably already know that it may be a little harder for you to get a mortgage loan than for someone who works at a big company. But it’s far from impossible. Use this guide to figure out what kinds of documentation you’ll need to show a lender, common reasons the self-employed may get denied for a loan and how you can make yourself more attractive to lenders.
Documents to Show the Lender
Obviously, you’ll need good credit and a low debt-to-income ratio, and you’ll need to give lenders bank and brokerage account statements as well as proof of any other debts or assets you own. But it’s the income issue that often stumps self-employed workers, because you can’t just hand the bank past pay stubs like you would if you were working for a big company. You’ll need to provide personal and business income tax returns from years past (typically for at least two years, as many lenders use the average of your past two years’ income). You may also have to bring a quarterly profit-and-loss statement. Each bank is different, so you’ll want to call the bank ahead of time to get a list of required materials.
Common Reasons the Self-Employed Get Denied for a Loan
One of the biggest reasons the self-employed get denied for a loan is that they haven’t been self-employed for long enough. Lenders like you to have been self-employed for two years or more typically. Another issue is not showing enough income. Unlike salaried borrowers, self-employed borrowers use net income instead of gross income for their debt-to-income (DTI) ratios. Often, when you’re self-employed you take a lot of tax deductions, which means that you show less net income on your returns. This can mean that you’re not showing enough income on paper for lenders to think you’ll be able to pay your mortgage easily.
How You Can Look More Attractive to a Lender
In addition to making sure you have the required paperwork for the bank and have been self-employed for at least two years, there are a number of other things you can do to boost your chances of getting a mortgage loan.
First, it helps to have a lot of cash on hand. Because the irregular income of self-employed people can make banks nervous, you’ll want to show them that you can make the mortgage payments even without that income coming in. Try to have a year’s worth of mortgage payments in a savings account. Another way to show regular income is to purchase an immediate annuity, which will start paying you regularly immediately. Word of warning: These can be pricey, so this might be a last-resort option.
Consult with your accountant to make sure that you’re showing enough income. You may want to do an amended tax return so that, on paper, you show more income (Beware: This may mean you have a new tax bill to pay). Finally, you may want to consider getting a co-signer and using a lender who has worked with self-employed borrowers before.