Getting approved for mortgages for self-employed can be a challenge if you’re self-employed. Most lenders qualify you similarly to borrowers who aren’t in business, looking at credit history, down payments and income.
While every lender has different risk-mitigation policies, there are ways you can increase your chances of qualifying for a loan. Here are some of the key steps:
Mortgages for Self-Employed: Tax Returns
Your tax returns can play a big role in your mortgage application. They are usually the most comprehensive financial document that lenders request when you apply for a mortgage.
Tax returns show how much money you make and what your tax obligations are. They also help you determine whether you have enough money to cover your mortgage payment and any other expenses.
Self-employed borrowers often face additional challenges when applying for a mortgage because of their complex income calculations. These calculations are based on the taxable income that the borrower thinks they make, plus any deductions the business owner claims to take on their tax returns.
This can result in a reduction in the borrowers’ monthly income that may not be realistic for the borrower to live on. It can also impact the loan amount the lender will approve for the home because it can reduce the down payment required to purchase the home.
It’s important for self-employed borrowers to get their tax returns in order before they apply for a mortgage. While there are some conventional loan programs that only require one year of tax returns, the majority of government-backed loans ask for at least two years worth.
The lender will look at your tax returns to make sure you’ve filed all of your taxes and that your earnings are accurate. They will also check to see if you have any tax liability and to determine whether or not you’ve received any refunds in the past.
If you do have any tax liability, it’s crucial that you pay your taxes by the due date to avoid interest and penalties on the refund. You can also file for an extension, giving you an extra six months to submit your return.
A good rule of thumb is to get your tax returns in order at least a month before the filing deadline so that you have time to prepare them and file them properly. This will allow the IRS to process your tax return and deposit any refunds you’re due in a timely manner.
Mortgages for Self-Employed: Bank Statements
Bank statements are a great way to show lenders your income, even if you’re self-employed. But they must be backed up by other documentation, such as invoices or cash deposits.
You may also need a profit and loss statement, which tracks your business’s revenue and expenses over a specific period of time. You can get these from an accountant or with a software program that lets you create them yourself.
If you’re a self-employed person, make sure your bank accounts are clearly labeled for business purposes so that you can pull those documents easily and quickly. This will help streamline your transaction records and ensure you present clear, detailed information to a lender.
One of the biggest reasons that self-employed people have a hard time getting approved for a mortgage is that they typically have extensive tax write-offs, which lower their income. These tax benefits can hurt your chances of securing a conventional loan, because traditional lenders use adjusted gross income to calculate qualified income for a home loan.
Luckily, there is an alternative to traditional home financing for self-employed borrowers with substantial tax write-offs: bank statement loans. These loans require prospective borrowers to provide a certain number of months’ worth of bank statements to prove their income.
While this type of loan is often a good option for self-employed borrowers, it’s important to consider all the options before applying for a bank statement mortgage. For example, many self-employed borrowers have low credit scores, which means they’ll likely need to make a larger down payment or qualify for a more traditional mortgage.
It’s also important to choose a lender with experience in the bank statement loan space. Ideally, they’ll be knowledgeable about the bank statement mortgage program and have a track record of helping self-employed borrowers.
While this type of loan can be helpful for self-employed borrowers with large tax write-offs, it’s not always the best choice. In addition, these loans have higher interest rates than traditional loans, so it’s generally better to stick with a conventional mortgage if you can. Depending on your income and debt-to-income ratio, you might need to put down 20 percent or more to qualify for a bank statement mortgage.
For self-employed borrowers, personal credit is an important part of getting a mortgage. It provides lenders with insight into your debt history and whether you have a track record of making payments on time. It also gives them an idea of how much of a risk you might pose to them if you default on a loan.
Your credit report can show a lender that you have a stable job and steady income that you can afford to repay on your mortgage. You can demonstrate this by providing documentation, such as a business license, letter from clients or statements from an accountant.
Lenders also review your tax returns, bank statements and other business records to verify that you have a steady source of income. You can make this process easier by keeping your business and personal accounts separate. This will help the lender understand how much you earn from your work, says DeSimone.
One way to build up your credit is by using a credit card or a personal line of credit (PLOC). These lines of credit are similar to a credit card, except they come with a set draw period and interest is only charged on the amount you borrow. After this draw period ends, you can continue using your line of credit, but you will need to pay it off during a set repayment period.
You can get a personal line of credit at most banks, credit unions and other issuers. They can be a good option if you have ongoing projects that require additional funding, such as home renovation or wedding planning. However, a credit card is preferable for everyday purchases, as you can rack up rewards like cash back or travel miles.