Can a Self Employed Homebuyer Get a Mortgage? If Yes, How?

If you’re self-employed, it’s possible that you can qualify for a home loan. Self employed borrowers must be able to show evidence of an active source of income, which could be challenging.

According to a survey of senior loan officers by the Federal Reserve. Many mortgage lenders tightened credit requirements in the wake of the coronavirus crisis. Self-employed applicants might expect to see a few additional application requirements in order to demonstrate they have the financial health necessary to qualify for a loan.

Is Getting a Mortgage More Challenging When You’re Self Employed?

Getting a self employed mortgage can be more complex than getting a loan as an employee of a company. This is mainly because a self-employed person’s income can fluctuate on a whim. Which could make you a high-risk borrower in lenders’ eyes. After all, lenders want to ensure they’re loaning money to someone who will be able to repay them. Any documentation that a self-employed borrower can provide that demonstrates their financial stability, such as an income statement. Will help lenders feel more comfortable about lending him or her money for a house?  Ashley Moore, a community loan manager at JPMorgan Chase, says, “Every consumer is so individually qualified, and their businesses are so distinct, so each one needs to be looked at differently.”

Lenders Fannie Mae and Freddie Mac require two years of self-employment income before approving a self-employed homebuyer for a home loan. Self-employment mortgage lenders prefer self-employed applicants who have been in business for less than two years provided their previous employment experience and income levels are comparable or greater.

How Do You Get Approved for a Mortgage If You’re Self Employed?

To qualify for a self-employed mortgage, you must demonstrate to the lender that you will be able to pay back the loan over the loan’s term while being self-employed. Here’s what self-employed borrowers should bring to the table when applying for a self-employed home loan:

Evidence of a Stable or Increasing Income

Self-employed mortgage lenders prefer to see two years’ worth of tax returns as part of the loan application process. Lenders may use the applicant’s lowest annual income out of the two years when crunching numbers to determine their worst-case scenario analyses.

It’s essential that you keep in mind that a lender will be concerned if your revenues and income drop significantly from year to year as this may be interpreted as a sign your cash flow, and your ability to repay the loan, is declining.

In light of the pandemic, it’s natural to expect some income fluctuations. Since many businesses faced periodic downturns and unique income patterns. Fannie Mae and Freddie Mac provided updated guidance in 2020 on how lenders should establish income stability. Additionally, self-employed applicants are now required to submit a profit and loss statement for the current year and bank statements for the 4-6 months.

1. Consistent Work

A minimum of two years of self-employment revenue in the same field is recommended. Some lenders will make an exception and allow only one year’s worth of self-employment tax returns and W-2s from an employer in the same profession depending on the circumstances. It will be more difficult to get approved for a mortgage if you haven’t been self-employed very long.

2. Good Credit

Paying your debts on time is a must, especially if you’re self-employed. Your revolving credit accounts and how frequently you’ve sought credit in the past year will be examined by lenders during the loan application process since there is a higher risk that self-employed buyers will face foreclosures and payment delinquencies, and bankruptcy cases due to income instability.

3. Low Debt-to-Income Ratio

Borrowers with debt-to-income ratios under 43% are more likely to be approved for loans. You may not be eligible for a self-employed mortgage or accept an offer to buy a home if your debt obligations are much higher than this percentage.

If you’re self-employed and frequently deduct business costs, there are certain things to keep in mind as it relates to your debt-to-income ratio. Mortgage underwriters generally look at post-expense income when determining a prospective borrower’s eligibility. A self-employed borrower can write off several items and, as a result, those tax-saving deductions may reduce your net worth and harm your debt-to-income ratio.

Self-employed borrowers should ask their loan officer to provid\e a copy of the worksheet that will be used to calculate their income for loan qualification purposes so that they can run the numbers themselves using different scenarios before applying for a loan.

4. Cash Reserves

Your monthly mortgage payments regardless of whether or not the business is booming. You may want to show lenders that you have an emergency fund in case you don’t make enough money during the months when you don’t work.

5. Larger Down Payment

Some lenders now require homebuyers to pay a 20% down payment as part of the finance of a home. The down payment criteria apply to self-employed borrowers as well as homebuyers who are employees at a company.

However, a self-employed homebuyer may benefit from putting more money down because it will improve the borrower’s debt-to-income ratio. Keep in mind, though, that it’s still possible that a larger down payment will not change the outcome of a loan application if the lender sees other red flag information on the application.

What Documents Are Required When Applying for a Loan as a Self Employed Homebuyer?

When submitting a mortgage application, you’ll want to submit all of your financial information. As a self-employed loan applicant, that will mean submitting both your business and personal financial records.

The coronavirus outbreak created a higher level of economic anxiety, so lenders are taking additional precautions to verify income during the loan application process. Many lenders will ask for proof of income early in the mortgage process and then again at closing.

If you’re self-employed and applying for a loan, be prepared to provide the following documents with your loan application:

• A government-issued identification card;
• Individual and business tax returns for the last two years;
• IRS Form 4506-T, which permits third parties to examine your tax records;
• A list of your professional and personal bills and expenses, including canceled checks for your current rent or mortgage;
• Social security or disability benefits, if applicable; and
• Any other documents from your accountant and clients if requested by the lender.

 

Fannie Mae and Freddie Mac require verification of business activities (i.e. invoices, company payments, or live websites) to show proof of your self-employment status.

Make sure your documents are up-to-date and organized before submitting them with your loan application. Make sure your documents paint a clear picture of your financial situation for the lender.

How Can You Plan For a Mortgage When You’re Self-Employed?

If you’re self-employed and ready to buy a property with a lender’s help, there are several ways to put your best foot forward. Work to improve your credit rating. Before a mortgage lender checks your credit, review your credit report to detect any issues, and contact the credit bureau if you find any mistakes. If you have a low credit score, lenders may reject or raise your interest rate.  Look for any other areas of concern, such as areas where you’re utilizing a high credit limit, and attempt to improve it.  You should also develop a portfolio of successful self-employment projects. Also, maintain a regular work schedule as much as you can.

The best time to apply for a mortgage is two to three years after you’ve had a steady stream of income. Also, avoid applying for additional loans or credit cards, which could adversely affect your credit rating. Here are a few other things to do before you apply for a mortgage if you’re self-employed:

1- Pay Down Debt

It’s possible to improve your credit rating by paying down some or all of your outstanding debts. A lower debt-to-income ratio will make it easier to get approved for a mortgage.

2- Maintain Clean Business Records

It’s essential that lenders can clearly assess your company’s revenues. It may be helpful to keep personal and corporate finances separate. Bills and monthly expenses should be tracked, and an earnings statement should be generated at least once every three months to provide lenders with a snapshot of your business’s financial health.

3- Save As Much Money As Possible

Don’t spend all of your money on the down payment; save money and put it in an emergency fund.  Lenders would rather have borrowers who can make payments despite periods of unemployment or unexpected home repairs.

4- Don’t Believe in the Misconceptions

Lenders are willing to work with self-employed borrowers despite the additional paperwork that may be required. Don’t be discouraged–ensure your paperwork is in order and apply for that property loan anyway!

Final Thoughts

Lenders approve loans for self-employed persons every day. If you’re self-employed and are ready to buy a house. Be sure to maintain your business and personal bank accounts and have enough money in savings to meet loan and down payment requirements. In addition to that, make sure your business records are in order. So that it’s easy for the lender to get a clear picture of your financial health.

Related Article:

How Good is Mortgage Refinance for you in NYC?
Mortgage Constant: Definition, Formula, & Complete Explanation
How to Avoid Paying the NYC Mortgage Recording Tax
How Much House Can I Afford Rule Of Thumb