You might have heard it’s more challenging to get a mortgage if you’re self-employed.
And it is true that self-employed homebuyers do have to jump through a few more hoops than a W-2 employee. Namely, you’ll have to gather a bunch of paperwork to validate your income and self-employment history. Yet taking the time to organize documents will be well worth it when you’re holding the keys to your new house.
Mortgage basics for self-employed borrowers
Mortgage lenders consider the same criteria when looking to qualify borrowers, whether you’re self-employed or a regular employee. In other words, you’ll be filling out the same mortgage application as a person who gets a W-2 every year.
Lenders will examine your income, debt-to-income ratio, assets, and credit score.
However, since business owners or freelancers usually have an income that fluctuates, lenders have to take a closer look at the vitality and stability of your business.
Lenders need to verify that your income is high enough—and will remain at that level—to make monthly mortgage payments to repay a loan.
What lenders need from self-employed borrowers
Most lenders require the paperwork to support a two-year self-employment history.
“Not only must the individual have been in business for two years, but most programs also require a two-year history of filing tax returns as self-employed,” says mortgage lender Alvaro Moreira, owner of the Georgia mortgage company Moreira Team.
Depending on how your business is structured, you might be asked for two years of your 1099s or a statement from your accountant as proof of self-employment history.
If you’re a hair stylist, contractor, or another professional requiring a license, you could show a lender your state license as proof of how long you’ve been in business. You’ll also need to bring a signed year-to-date profit and loss statement, balance sheet, and at least three months of business bank statements to the table, adds Moreira.
The application process might be longer
Generally, processing a mortgage application will take the same amount of time as it does for a traditional borrower. However, gathering all your documentation can sometimes stall the process, especially if your business has recently experienced changes.
What counts as eligible income
Are you a gig worker with many different clients, an independent caregiver, or a cupcake bakery’s sole proprietor?
Whatever money you’re earning—including tips—counts. Lenders are mainly looking to see if your income is stable.
“All types of income are welcome, including part-time, seasonal, odd jobs, business owners, corporations, etc.,” says Mallory Miller, vice president of purchase lending for Lower.
Lenders look at your income differently
Lenders look at the net income when you’re self-employed versus the gross income of W-2 workers.
That difference could muddy the water a bit. Generally, when you’re self-employed, you’re looking for all the savvy tax breaks you can get to lower your net income so you don’t have to write a big check to Uncle Sam on tax day. Yet, that tax break can make it harder to qualify for a mortgage if your net income is low or you take a loss.
“It can be a tricky trade-off,” says Miller. “Although paying lower taxes on less income is certainly preferential, it may not allow you to qualify for as much house.”
So if you’re thinking of buying a home in the future, you might want to consider taking fewer tax deductions now. Talk to your accountant and lender to weigh the pros and cons first.
By Lisa Marie Conklin for Realtor.com. Read the full article here.