How to Get a Mortgage If You Are Self-Employed
Getting a mortgage as a self-employed individual can be more challenging than for traditional W-2 employees, but it is absolutely possible with the right preparation. Since you don’t have standard pay stubs from your employer, lenders simply need sufficient documentation to verify your income. Here are some tips on how to get a mortgage while being self-employed.
How to get a mortgage if you are self-employed
Build a solid income history
Most lenders want to see at least two years of steady growth in self-employment income. They typically request your federal tax returns (personal and business) for the last two years to verify your self-employment income. The more years of documentation you can provide to prove your income growth, the better.
Maintain a solid credit rating
A low credit score will always affect your ability to qualify for loans at decent rates. And because other forms of income are less obvious, your credit score carries extra weight in confirming your creditworthiness. Most lenders require self-employed borrowers to have a credit score of at least 700.
To maintain a high credit score , pay all bills on time, keep your credit card balance low, and avoid taking on new large debts before you apply.
Minimize your debt to income ratio
Lenders calculate your debt-to-income (DTI) ratio by adding up your total monthly debt payments and dividing it by your gross monthly income. Given fluctuations in self-employment income, you need this DTI to be below 43% to be eligible. This may mean paying off debts before applying.
Minimize your write-offs
It can be tempting to write off every possible expense to minimize your taxable income, but this can backfire when trying to qualify for a mortgage. Lenders want to see maximum income to ensure you can repay the loan. If you’re considering a mortgage this year, don’t write off more expenses than are absolutely necessary.
Be prepared with documentation
After filing at least two years of tax returns, prepare documents to support your sources of self-employment income, such as 1099s, profit and loss statements, quarterly tax statements, business licenses, client accounts and more. The more you can document, the better.
Get Pre-Qualified and Compare Lenders
Get pre-qualified with several lenders to compare rates and requirements. Meet with local banks, credit unions and specialty self-employment lenders. You can absolutely qualify for a mortgage as a self-employed borrower – being organized and having a good reputation will make the process smoother.