It’s one of the American dreams to own your own business and work for yourself. There are many benefits that come with being your own boss, however there are some negatives as well. Being self-employed comes with its own set of difficulties, and qualifying for a mortgage can be one of them. I wanted to outline some of the things lenders look at when you’re self-employed, and what to expect when going through the process.
Income is likely the biggest thing if you want to buy a house when self-employed. Your income can fluctuate greatly when you work for yourself. You can have great months followed by months that you are barely getting by. Thus, budgeting is key.
Ultimately, the lender wants to see something they can “count” on. They will likely ask for the following:
- Personal income tax returns for the past two years
- Business tax returns for the past two years if you operate as a corporation or partnership
- Something official (CPA, business license, etc.) that shows you’ve been in business for at least two years
If you don’t have any of the above it’s going to be a challenge to get a mortgage. I will say that it also depends on the lender and what they want. Assuming you’re able to provide the above information, they will do the following:
- Average your income for those two years. They will typically go with the average, not your high income number
- They look for an upward trajectory. If you don’t have an upward progression in income you may face a challenge
I’ll spare you the extended detail, but the lender is looking for a certain level of health of your business. They want to make sure it’s moving the way they think it should. And, really, we should want our businesses to grow year over year – right?
You also need to keep in mind that they look at your net business income, not gross. So, if you’ve been overly deduction happy it can hurt when you try to qualify for a mortgage. Additionally, if you have W-2 income that is gold in the eyes of the lender so make sure to notify them if you do.
There are a lot of options for what you put down on a home. The traditional rule has always been to put 20% down, but this isn’t necessarily the best option, especially if it completely drains your liquid assets. It is always a good thing to show money in reserves. There is no hard and fast rule on this, but 3-6 months of mortgage payments in reserve will definitely help. Working out how much to put down is something you should discuss with a mortgage professional. When someone has some options of how much they can put down, I always like to sit down with them.
The same credit rules apply for salaried workers as it does for self-employed borrowers. Be sure and maximize your score before applying to get the best interest rates possible. My team and I offer free credit consultations, so reach out to us to schedule one to make sure you maximize your score before locking in an interest rate.
Debt is a big factor in determining eligibility for a mortgage, and being self-employed presents unique factors. If you have a business loan, and it shows up on a credit report, it will be counted against you. Same thing if you have business credit cards that are in your name. However, if we can show that the business itself pays these expenses and has been for 12 months, we may be able to remove it from your liabilities.
Do Your Homework and Choose the Right Lender
The biggest thing before jumping in is to fully understand what the process will be like. Being self-employed presents its own set of unique problems when trying to qualify for a mortgage, so choosing the right lender is absolutely necessary. Many lenders and loan officers don’t work with self-employed borrowers very often, and therefore, are not equipped to deal with the particulars of getting those loans closed. I love working with entrepreneurs and business owners, and understand what it takes to get you into a new home. Give me a call today to take a look at your situation and come up with a game plan. (314) 472-DOUG (3684)