Home prices are still quite low, and mortgage rates remain at record-low levels. As a result, many consumers are considering buying homes right now. It's possible to get a good deal, and it's likely that rates will start rising in a few years. Because of the current conditions, it seems reasonable to buy a home right now. And, even if you don't want to buy another home, it can make sense to refinance, locking in a lower rate for the remainder of your home mortgage loan.
But what if you're self-employed? Will you be able to get a mortgage when you don't have a W-2 and pay stubs you can show your lender? Even with the tighter lending standards, you can be approved for a home mortgage loan, even if you're self-employed and running a home business. Just be prepared to show a lot of documentation.
What Documentation Will You Need?
If you are self-employed, you will have to show your latest tax returns. Normally, the lender averages your last two tax returns to get an idea of your monthly income. This can be somewhat distressing for the self-employed, since many of us take every deduction we can in order to reduce taxable income. However, there are other ways to show that you are making a solid living from your efforts. You will probably be asked for a quarterly profit and loss statement. Indeed, if you want a FHA loan, you will be required to submit a year-to-date profit and loss statement if your last tax return was filed more than a quarter ago.
Another option you have is to pay yourself a salary. If you have organized as an S-Corp., and even if you have another business organization, it's possible to pay yourself a salary. You can show that your business venture is enough to provide you with a regular salary, and that can bolster your case. You might also show your bank account statements as a way to prove that money is coming in. When I applied for a mortgage five years ago, my lender's underwriters required that I hire an accountant to perform an income audit to help establish my income.
Credit, Debt, and Assets
On top of your income, lenders also want to know what your current financial situation looks like. Lending standards have been tight since the global financial crisis, and this is especially true for self-employed borrowers. If you are self-employed, you need to make doubly sure that your situation is solid. You will, of course, be subject to a credit check. Additionally, your lender will want to know your debt to income ratio. If you have a high debt to income ratio, lenders are likely to be concerned that one bad month at your business could lead to problems.
You will also have to show what assets you have at your disposal for a down payment, as well as in reserve. Lenders generally want to see that you have two or three months' of mortgage payments in reserve before they approve you. As long as you have the assets and good credit to back up your income, you should be able to secure a mortgage loan — and get a good interest rate to boot.
Hey Miranda, I went through this process twice being self-employed, once buying and once a re-fi.
And yeah, it’s totally possible, but boy is it a pain. They both took volumes of documentation and the refi literally took over 6 months. When thinking about a refi, you really have to consider whether the savings is worth your time….filling out documenation became like a part time job!
Lance @ Money Life and More says
It is definitely harder to secure a loan as a self employed person. Try to break out your cash and non cash expenses so they can see while you may show zero profit it is due to non-cash expenses such as depreciation.