Cervone Deegan + Associates knows that buying a home if you are self-employed may be a bit more challenging. A self-employed home buyer will have to jump through a few more hoops than someone that is a W-2 employee as you validate income and work history but it is all worth it in the end. Here is a closer look at what to expect.
Everyone who purchases a home that needs a loan will have to go through a mortgage qualification process. These lenders will review your debt-to-income ratios along with your credit report to assess your overall financial profile. However, those who are self-employed often have more fluctuating incomes so there typically will be more questions or documentation required to research the stability of the business.
Most lenders will insist on a paper trail to review a two-year history of employment. This will be in the form of tax returns for the past two years to show proven income. Depending on how your business operates a statement may be asked of your accountant proving income as well as copies of recent bank statements.
The time needed to process the application for a self-employed person should typically be about the same as a traditional borrower, but sometimes gathering all of the necessary and additional documentation can push things out just a bit.
Whatever you earn for money is looked at whether it's regular checks or tips. What lenders want to know is 1) what your typical income is and 2) how stable it is.
How Lenders View Your Income
Lenders will look at your net income rather than the gross income of a W-2 worker. The reason is that generally, those who are self-employed will sometimes take advantage of crafty tax breaks to show a lower income resulting in lower taxes they have to pay. However, this can be a trade-off when it comes time to qualify for a mortgage where you want your income to show higher. If you know you are planning on buying soon, consult with your accountant on best practices for loan approval.
What if You Are Not Approved
There are many reasons why anyone can get turned down for a loan and not just those who are self-employed. It could be from reasons of bad credit, a high debt-to-income ratio, or an inconsistent income. You can either wait until your financial profile improves or you could apply for a bank statement loan. This type of loan uses an average of deposits instead of the usual tax return calculation. Just note these loans don’t have any of Fannie Mae or Freddie Mac’s guardrails. Rates can be higher along with other less-than-appealing features so this should be your last resort option.