More people are self-employed than ever before. In fact, according to the accounting software company FreshBooks, in 2018, there were a whopping 42 million self-employed in the US. Of course, that doesn’t mean that these people are full-time entrepreneurs. In addition to their full-time job, many have side gigs like Uber or Upwork. And others sell on Amazon or eBay. Yet, those brave souls are indeed 100% on their own with no boss to fall back on. That leads to the question – what are the best self-employed mortgage loans, and how can you get a mortgage if you don’t have a traditional job with a regular paycheck. Read on to get the facts.
Self-Employed Mortgage Lenders
Lenders fall into three basic categories.
- Won’t touch a self-employed borrower with a ten-foot pole
- Say they work with the self-employed but don’t know how to calculate income
- Specialize in self-employed borrowers and know how to calculate income
Of course, there may be something in-between, but those are the three basic categories. Here is your biggest tip. Work with lenders in the third category.
Find a loan officer that understands income. The best lender for helping you obtain a self-employed mortgage knows how to calculate income and read tax returns accurately. It’s a pretty complicated formula that involves a self-employed borrower worksheet and knowing what numbers to plug-in from where. Plus, there are variations depending on if you’re a corporation, LLC, or Sole Proprietorship.
Calculating Self-Employed Mortgage Income
Here’s the rub when you’re self-employed. You want to get the most deductions possible so you don’t have to pay taxes. That’s fine on tax day, but it’s not so great when applying for a mortgage with a business loss. If your business is in the red, you’ll have some work to do before you can get a mortgage.
When it comes to income – taxable income may not be the same income used for underwriting. Some deductions can be added back to make the bottom line look better, for example, depreciation. Although depreciation is a deduction – it didn’t come out of your bank account.
So, when you’re filling out your loan application, it’s essential to get help calculating your self-employed income, so you’re putting the correct numbers in.
How to Get a Self-Employed Mortgage
Mortgages for self-employed borrowers are just like any other home loan. There are conventional and government-backed loans like FHA, VA, and USDA. They follow the same rules.
- Credit – you’ll need a score of 620+ (the higher, the better)
- Income – you need enough income to cover your debts and have some leftover
- Assets – you need to have money in the bank and funds for a down payment
As a self-employed borrower, you need to know your bottom line. That starts with making sure your loan officer knows how to calculate your income accurately. Here’s the primary documentation you’ll need:
- Taxes – two years of business and personal
- W2s – if you pay yourself as an employee
- P&L – a simple profit and loss statement will do – it doesn’t have to be fancy
- Bank statements – two months all accounts, business and personal
- Proof of business – your business license, a letter from your accountant
- Other income – evidence of any additional sources of ongoing income
Here’s the bottom line. As a self-employed borrower, you’ll need to provide much more documentation than if you had a regular W2 job. So, getting organized and prepared ahead of time will make the process smoother.
Home Loans – When You’re the Boss
Here are some other tips to help get yourself approved for a mortgage loan. Have a good credit score – 620 is just a starting point. When it comes to being self-employed higher is better. See if you can save a larger down payment. That’s another point in your favor. And lastly, reduce your debts as much as possible.
Debt-to-Income Ratio (DTI) – the underwriter will look at your monthly debts compared to your monthly income. Ideally, it needs to be 43% or lower. Here’s an example:
- $2500 debts – credit cards, car loan, mortgage payment
- $6,500 income – calculated by a loan officer that knows what they’re doing
That’s a 38.5% DTI. Keep in mind – that when your debts are lower, you don’t need as much income. So, one option is to pay down your debts as low as possible if you don’t have a high income.
Whether you’re a self-employed, a first-time homebuyer, or 2nd and 3rd-time buyer – Homestead Financial Mortgage is here to help you get a purchase or refinance mortgage. And if you’re selling and using your proceeds to buy your next home – ask us about getting your mortgage recast. A recast can take the stress out of selling your home and rebuying in a hot market like we have today.
We specialize in mortgages for self-employed borrowers. Our low-interest home loans are some of the best in the states we serve: Arkansas, Colorado, Florida, Illinois, Indiana, Kansas, Missouri, Ohio, Tennessee, and Texas. Contact us today to learn more about the home loan products we offer that are right for you.