Mortgage Matters for the Self Employed
Buying a home takes preparation and documentation, regardless of the circumstances. Self-employed mortgage applicants may consider the task even more daunting. However, the process remains foundationally the same, even for entrepreneurs and small business owners.
Begin your self-employed house hunt with a clear understanding of what your lender will be looking for and how your employment status may impact the process. An informed approach will allow you to address the challenges before they become obstacles and create a plan for achieving your homeownership goal.
As with any mortgage applicant, a lender will focus on your financial history before your interest in buying a home. You can expect a thorough review of your credit report, which will likely document unpaid debts or late payments to other creditors. Before applying for a mortgage, be sure you take the time to review your report to check it for inaccuracies. If there is undisputed evidence of poor financial decisions, delaying your home search while you take steps to improve your credit history could be smart.
In addition, an applicant relying on self-employment as the primary source of income will likely need to show a minimum of one year, and in many cases, two years of their business’s financial history. This may include W-4 forms from clients, business tax returns, and bank statements. If your company has existed for less than two years or its profitability has increased dramatically in the past year, it could be another reason to temporarily delay your application. Extending the available history will allow the underwriter to consider the most accurate reflection of your current situation.
Putting yourself in the best position for mortgage approval includes maximizing your verified income. Often, self-employed applicants are concerned that their taxable income is not a reliable representation of monthly income. Business-related deductions and tax strategies such as asset depreciation are common and appropriate ways to reduce taxable income, and could unfairly impact applicants applying for a mortgage.
In many cases, lenders reviewing a self-employed borrower’s eligibility will have a unique formula to determine qualifying income. Typically this adds irrelevant deductions back into their taxable income. However, be aware that this process may also ignore income that does not appear to be consistent or stable, and its ability to increase your borrowing power will depend on your business’s specifics.
Beginning the conversation with a lender well before you plan to purchase a home is critical. It offers you the ability to confirm what documentation they’ll be asking for and gives you time to work with your accountant to change your approach to business expenses or file amended tax returns that could benefit your application.
Open Mortgage is experienced working with applicants from across the financial spectrum. Whether it’s understanding your credit score or finding the right Realtor, we have the educational resources, such as this video for self-employed borrowers, to point you in the right direction. Click or call to find out more.