Submitted by: Anna Platz

1. You may need a two year track record.

This is not a hard and fast rule, but many mortgage lenders will want to see a two year history of self-employment in your chosen field. They want to be able to show that a certain earning level is consistent, and not the result of a few good months.

2. Your income is what’s on your tax return, not what’s on your paycheck.

Some self-employed borrowers have a tough time qualifying for a mortgage that they can reasonably afford because they write off a large portion of their income as business expenses in order to limit their tax liability. This can be an issue when applying for a home loan (or other credit account) because it lowers the borrower’s income on the tax returns which will be used to document annual income.

3. You will be asked for additional documentation.

As mentioned above you will likely be asked to prove your income by providing copies of your tax returns. Most often lenders like to see returns for the two previous years. In addition you will probably asked be asked for copies of the following items, and potentially additional items depending on your scenario over and above the standard documents requested on a mortgage application:

* your business license

* a letter from your accountant

* a balance sheet and profit & loss statement for your business

4. Credit score, reserves, and ratios will be especially important.

These items are crucial to any underwriting decision, but when self-employed you want to do everything you can to present yourself as an attractive (low risk) borrower. Maintain a high credit score, build up your savings account, and work to get your debt to income (DTI) and loan to value (LTV) ratios in line. Many mortgage lenders will only approve a loan if the DTI is 36% or lower (43% or lower for FHA loans) and the LTV is 80% or lower (meaning you have 20% or more equity in the property). The better these numbers are, the less risky the loan is in the eyes of the underwriter. The less risky the loan, the better your chances of being approved for low mortgage rates.

5. You don’t need to own the business to be treated as “self-employed”.

Even if your name isn’t on the front door you could be subject to the additional documentation and qualification requirements. If all or a portion of your compensation comes from commission, bonuses, or some other production or profit based pay, your mortgage lender will likely ask you to provide the previous two years tax returns.

Being aware of and prepared for these additional hoops you may need to jump through will allow you to best take advantage of the home loans for self-employed borrowers that are currently available. Though stated-income loans are largely a thing of the past there are plenty of home financing opportunities – it just may take a little extra effort before you can head to the closing table.

About the Author: Anna Platz is a writer and SEO Specialist with Wilmington SEO & Marketing, based in Wilmington, NC. She specializes in writing about mortgage lending and real estate. Learn more about current mortgage rates at

afrmortgage.com/

Source:

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