Mortgage for Self-Employed
It is generally considered to be more difficult for a self-employed person to get a mortgage than a W-2 employee. Some lending institutions may be concerned that you will not earn a steady enough income to make your monthly payments, and others may simply not want to deal with the additional paperwork that can be involved in providing a mortgage. We are here to help self-employed persons and describe all the pitfalls.
First of all, your business must have been open for at least two years and have the same structure. If the structure has changed, you need a clear explanation from a third party as to why the structure has changed.
The bank will use your tax returns to see what your income is. Do not use a lot of business expenses to reduce taxable income on tax returns, forcing lending institutions to wonder if you make enough money to afford a home. Lenders may want to see a lower loan-to-value ratio, meaning you will need to come up with a larger down payment.
Also, do not keep mortgage principal in your business account; this could cause alarm to the bank. Especially if it is a recently earned amount, the bank may have questions about the stability of the business and may require a letter from an accountant stating that there is no negative impact on your business by spending this amount, or you will need to show the bank a reserve of funds in another account. Therefore, it is wise to transfer money from your business account to your personal account well in advance.
Here are steps you can take to make yourself a more attractive loan candidate:
- Improve your prospects by increasing the credit score, offering a larger down payment, or paying down debt, among others.
- Do not use much business expenses to reduce taxable income.
- Your mortgage options include Conventional loans, FHA loans, and bank statement loans:
- Conventional mortgage loan is a conforming mortgage product made without guarantees or collateral from a government entity. Conventional mortgages are made by private lenders and can be sold to two government-owned entities, Fannie Mae or Freddie Mac.
- FHA loan is a loan secured by the Federal Housing Administration. The Federal Housing Administration does not originate the loan itself; it only insures eligible lending institutions against mortgage defaults.
- Bank statement loans, also known as alternative document loans, allow borrowers to apply for a loan without submitting the traditional documents that prove income, such as tax returns and W-2s. Instead, lenders look at 1 to 2 years of your bank statements to determine your business income.
- It’s also possible to take out a joint mortgage or enlist a cosigne:
- Joint mortgage assumes participation of a co-borrower who is a W-2 employee, such as a significant other, spouse, or trusted friend.
- Cosign presumes enlisting a co-signer like parent or other relative to your mortgage loan but this person will need to be willing and able to assume full responsibility for the loan if you default.
LBC Mortgage experts have an extensive experience working with self-employed persons and are ready to offer the best conditions for mortgage approval for the purchase of your dream home!