self-employed-mortgagesFor many people, quitting your job to become your own boss is as much a part of the American dream as owning a home.

Running your own business means you finally get to have some freedom and control over your life.

You get to set your own schedule and decide how many hours you will work.

You can work alone. If you work with others, you can be choosy about the people with whom you work.

Running your own business means you are in command of your dress code. You can work in your PJ’s if you want because you’re the boss.

Owning a business means not being micromanaged. No one will be standing over your shoulder telling you what to do, how to do it, and when to do it.

Being self-employed can have a number of perks. Unless you understand lending guidelines, obtaining a home loan as a self-employed borrower can have its challenges.

SELF-EMPLOYED MORTGAGE LOANS

Prior to the housing crisis, self-employed borrowers had a variety of loan options available to them.

If you had good credit and could provide some income and asset documentation such as bank statements or other asset statements showing adequate funds, lenders could get creative. Creativity can result in low down payment loans with lower interest rates.

Abuse of the system led to many of these self-employed mortgage loans being dubbed “liar loans”, due to a considerable exaggeration of the amount of income being earned.

Nowadays, rarely will you find a lender offering no-income verification, or stated income loans.

YOU CAN GET A MORTGAGE IF YOU’RE SELF-EMPLOYED

The reason that self-employed mortgage loans get a bad rap is because a large number of self-employed borrowers don’t show enough income. This is typically because many self-employed borrowers write off as many expenses as possible so that they can get a break on their tax bill. This tactic is what often prevents them from qualifying for a mortgage due to excessive debt-to-income ratios.

When assessing a self-employed applicant’s eligibility, amongst other criteria, lenders will look for consistency of income. When there’s significant fluctuations between years of taxable income, lenders will typically use the figures that relate to the lower of the most recent two years.

Contrary to popular belief, getting approved for a mortgage loan as a self-employed borrower really isn’t that difficult. The caveat is whether or not you can prove enough income, and for how long.

SELF-EMPLOYED PROFESSIONALS SHOULD PLAN AHEAD

To qualify for a mortgage in the next couple of years, self-employed borrowers should speak with an accountant and a mortgage professional now. It’s important to know how much income will be necessary based on the price range of the home you’re trying to purchase or refinance.

Generally, as long as you can document enough qualifying income, and show proof of being self-employed for at least two years, being self-employed won’t hinder you from obtaining a mortgage loan. Some loans require only one year’s proof of self-employment.

Another challenge for many self-employed individuals is that, unlike a non-self-employed W-2’d borrower, they can’t just provide a verification of employment (VOE) letter from their employer, nor can they offer paycheck stubs from their employer.

Self-employed folks will typically need to verify their income using documentation that includes tax returns, a business license, a signed statement from an accountant, a profit and loss statement, and a balance sheet.

Understanding what a lender wants to see can definitely make life easier for self-employed borrowers. As long as the lender can verify the income needed to qualify for the loan, the lender will process and underwrite your loan just as though it were any other mortgage.

 

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