What Do Home Buyers Need to Qualify for a Loan in 2017
Most people who get a home loan know they will have to go through an extensive documentation process to get approved. But what if you own your own business and need self-employed mortgage? There are more than 15 million self-employed people in the US as of 2017. Are they able to get a self-employed mortgage?
In most cases, yes, getting a mortgage as a self-employed person is very doable. You will need to provide more paperwork, but if you have stable income that you can document, odds are you can get a home loan.
Below are some of the most important guidelines for self-employed borrowers getting a home loan in 2017.
The income of the self-employed borrower is the most crucial factor for a loan approval. Lenders need to know how much you earn, just like a regular W-2 employee.
Most self-employed mortgage lenders will want to see two years of tax returns, which means your Schedule C from your IRS 1040 form. This is the part of the return that details profits and losses from a business.
If your income increased last year from the year before, most lenders will take the average of the two. But if the most recent year is lower, lenders must use the lower number.
Lenders also will want to see a profit/loss statement for the year to date. Some may want to see this data from an accountant, while others will take your word for it.
If you own several companies, you usually need to provide two years of tax returns for every company in which you have a 25% stake or more.
How to Improve Loan Approval Odds
Many people who want to buy a home who are self-employed may be married to a person who is a regular W-2 employee. If so, this makes the loan approval process easier. Both of your incomes can be used on the mortgage loan application. This is especially useful if your business showed a loss last year.
For instance, if your spouse earned $100,000 last year, and your business lost $10,000, your total income is $90,000.
Reduce Business Deductions
Most self-employed people report their income minus expenses for the year. For tax purposes, it usually benefits you to have your net income as low as you can. But the net income is what the lender is going to use to qualify you for a home loan.
So, any business deductions you make for that tax year are going to work against you for qualifying for a home loan. Borrowers need to decide if it is more worth it to get a higher mortgage or to pay less in taxes.
If you want to buy a home, you may want to take fewer business deductions in the two years before you apply for the loan. You will need to pay more in taxes, but you also will have an easier time using your income to qualify for a loan.
Keep Accurate Records
Another critical area for the self-employed borrower is documenting the source of your down payment funds. If you have large deposits coming into your business and/or personal accounts that you intend to use for your down payment, you will need to be able to show what the source of that money is.
It is a good idea to keep a separate business and personal bank account. This will make it easier for the mortgage lender to trace where funds are coming from for your down payment.
Prove Business Existence
Borrowers who are self-employed also need to prove that their company actually exists. For many lenders, all you may need are two years of tax returns. But others may want to see an accountant's statement, your business license, your website, and profit and loss statements.
Check with your lender to see what you are going to need to prove the existence of your company.
Most lenders require you to have been in business for at least two years before you can qualify for a mortgage loan. Some lenders may allow you to have one year of self-employment, as well as W-2s from your last employer. This may work as long it was in the same field.
Increase Credit Score
A self-employed borrower will always be a more attractive candidate for a home loan with a higher credit score. Make sure that you pay all of your bills on time for at least a year before you apply, and two years is better. Even taking out a HELOC loan can help raise credit scores in many instances.
Put More Money Down
The more equity you have in the home, the less likely you are to default. So, the lender may be more likely to give you a loan if you put down more money.
How Low Debt to Income Ratio
The fewer monthly debt payments you have, the more likely the lender will believe that you will make your loan payments. Try to pay down your credit cards and car loans as much as you can.
Generally, lenders want to see a total debt to income (DTI) ratio of 42% or less.
More Self-Employed Loan Tidbits
Today in 2017 it is quite easy to qualify for a home loan as a self-employed borrower. The best way to ensure you get approved is to have a very clearly documented source of income from your business for at least the last two years. If you can do that, your chances of being approved for your home loan are quite high. Ask about bank statement loans and no doc loans.
It also helps to have a high credit score, a low DTI, and a greater down payment. But a good, solid, regular income that is clearly documented with profit and loss statements, tax returns and bank statements is the most vital.
Home Loans for Self-Employed Individuals. (2017, Jan. 15). Retrieved from https://www.swmortgage.com/single-post/2017/01/05/Home-Loans-for-Self-Employed-Individuals