Buying and moving into a new home is one of life’s great experiences, especially if you’re buying your first home. From getting that pre-approval to the “yes!” response on an offer to closing and moving in, every step is exciting. And while the process is engaging and fun, it’s important to prepare for moving day […]
Being self-employed is no obstacle to getting a mortgage
The Covid-19 pandemic brought many changes to life around the world. In the U.S., one of those changes was an increase in self-employment as many companies downsized, moved to remote work and enacted other significant changes to their structures and work models.
This led to many employees taking stock of their work lives, which led to an uptick in the number of U.S. workers choosing to be self-employed. Today, nearly 11 percent – or 9.59 million members of the U.S. workforce – are self-employed. Self-employment offers advantages such as greater control over work/life balance, scheduling flexibility, choosing clients, and more.
Those advantages come with downsides, often including greater responsibility and in many cases, less income predictability. To many self-employed people, that lack of predictability is a challenge when it’s time to qualify for a mortgage.
The mortgage approval process is different for self-employed homebuyers
Contrary to what many self-employed people may think, getting approved for a mortgage can be more complex than others. Still, while the process may differ, it’s possible, especially for homebuyers who work with experienced loan officers.
In addition to working with a committed and knowledgeable loan officer, a self-employed homebuyer should be prepared to take a few extra steps than a buyer who works for a business, for example.
Think like a banker
For a lender, the bottom line of the mortgage application process is determining if a prospective buyer is a good candidate for financing.
In turn, a central part of that assessment is verifying an applicant’s credit history and income.
While credit history can be assessed through the credit bureaus, income verification for self-employed applicants can be complicated. So be prepared for this by:
- Clearly documenting your personal and business debt obligations.
- Verifying your business exists by providing a current business license with the name of the business owner(s), or a letter from a certified public accountant proving the business’s existence.
- Collecting documentation of your income generated by your business. This can be accomplished chiefly through your bank statements. You can also use reporting from an accountant or generated by your accounting program.
- Determining how much income you generate regularly and how much of a mortgage that amount will cover.
- Making sure you have two years – or more – of verifiable, steady income documentation from your self-employment.
- Making sure you have personal and business tax returns for the past two years, as well as bank statements documenting deposits of all tax refunds and proof of taxes paid.
- For S-CORP businesses, Making sure you have a copy of schedule K-1 to document your earnings.
- Making sure you have recent receipts/invoices and a current profit and loss statement.
- Making sure you have a verifiable down payment and funds for closing costs.
Understand that just as with any other borrower, lenders will also assess your debt-to-income ratio as part of their application process; the above information will be part of that assessment.
Credit scores matter
As with any mortgage applicant, credit scores are an important consideration for self-employed homebuyers.
Your credit score is a snapshot of your credit history that helps lenders determine risk in assessing you for financing. The higher your credit score, the lower your risk, the lower your interest rate on your potential mortgage. On the other hand, applicants with lower credit scores may be considered higher risk and will have to pay a higher interest rate on their loan.
Be prepared by checking your credit reports regularly and disputing or correcting any inaccurate information.
Consider alternative mortgages for self-employed borrowers
Self-employed borrowers should also consider state and local government homebuying assistance programs, or federal programs, many of which are excellent choices for first-time buyers. As with traditional mortgages, a high credit score can result in an easier approval process and lower interest rates with government-backed mortgages. And having two years or more of steady, preferably increasing income from your self-employment will improve your situation.
Also, bank statement loans are specifically designed for self-employed homebuyers who don’t receive paystubs or W-2 income. Lenders offering bank statement loans will instead review your business’s bank statement for the most recent 12 to 24 months, as well as your taxes and operating expenses, to determine your net income.
The processes can be lengthier and more complicated than a traditional mortgage process. Still, they really only involve producing documents you, as a business owner, will likely have readily available. Keep in mind that lenders see bank statement loans as being riskier than a traditional mortgage, which means they may require a larger down payment and/or a somewhat higher interest rate. However, like other loans refinancing in the future is an option.
The best news: Your loan officer is an expert
Your loan officer knows every step of getting self-employed borrowers approved for mortgages. Remember, your loan officer is not only experienced but also committed to looking out for your best interests and is there to ensure you get the mortgage that best suits your needs and meets your objectives.
Consult with a loan officer at SmartMortgage.com
Are you beginning the steps to purchasing a home? SmartMortgage.com by Guild Mortgage has experienced agents ready to help you start your journey to homeownership. We will help you review your finances and consult with you about what to expect and how much you can reasonably afford.