Trying to get a mortgage when self employed comes with its own set of challenges. Being self employed is a tough enough row to hoe (chiefly because of the many hats you have to wear) without the added burden of trying to convince a lending institution to give you a loan for a house. It’s certainly not impossible to get a mortgage when you are self employed. You just have to understand the process, have the necessary documentation, and be prepared to jump through the hoops. So here are some vital tips on how to get a mortgage when self employed in Floresville.
The Tallest Hurdle
There is one fairly tall hurdle you’ll have to overcome to get a mortgage when self employed. And that is the difficulty posed by not having proof of a stable, regular income and steady employment, as you would with a job. The simple fact is . . . lenders are hesitant to extend mortgages to those who are self-employed because they see them as greater risks. There is no guaranteed paycheck every week.
Necessary Documents
In order to overcome this greater-risk hurdle, then, you’ll need plenty of documents so show that, although your income fluctuates as a self employed person, you aren’t a risk after all. So, instead of W2 forms to verify income, here’s what you’ll need:
- Previous two years’ tax returns (at a minimum), including Schedule C tax form and Schedule K-1 (for partnership or S Corp)
- Bank statements, usually for at least the past six months
- Year-to-date profit/loss statements
- Business license from the past two years (but only for certain kinds of business)
- Verification of employment from your CPA (often, but not always)
- Verification letters from clients proving that you actually worked for themselves
Steps to Get a Mortgage in Floresville
Then there is a fairly well-established process you’ll need to follow to get that mortgage. The major steps in this process are . . .
PREPARE WELL IN ADVANCE
All your necessary tax documents must be in order and absolutely must be accurate. Then have all the other essential business documents (listed above) organized and ready to turn over to the lender. Your goal is to show that your business is legitimate, profitable, and sustainable and so little risk to the lender.
SEPARATE PERSONAL AND BUSINESS EXPENSES
Make sure you have separate bank accounts – one for personal matters and one for business expenses. This will make it easier for the lender to track business expenditures and deposits in order to assess the profitability of your business. You don’t want to mix funds between the accounts. If you absolutely have to do so, discuss the best method with your accountant.
EMPHASIZE YEAR-OVER-YEAR INCREASES
Do everything you can to illustrate the fact that your self employed business makes increasingly more money from year to year. Proving business growth will increase your odds of getting that mortgage.
HAVE A GOOD DOWN PAYMENT
Experts agree that coming to the table with a sizable down payment will show that you are much less of a risk as a borrower.
FORFEIT SOME TAX DEDUCTIONS
Tax and real estate experts also advise giving up some tax deductions in order to make your taxable income appear greater, which may allow you to qualify for a larger loan. People do understand that as a self employed businessman there are a lot of deductions you are entitled to take. But taking those deductions lowers your income and when applying for a mortgage that lower income on paper affects many things such as income level and the debt to income ration that is applied to your mortgage payment. So taking less deductions does help increase your income on your tax return.
GET LOAN APPROVAL BEFORE SHOPPING
Because it’s a little more difficult to get a mortgage as a self employed business owner, it’s a very good idea to get loan approval before even thinking about house hunting. Then, when you do get an agent and begin actively shopping, you’ll know exactly what you can afford and that you can actually get the financing. You never want the disappointment of finding your dream home and not being able to finance it.
The Most Important Tip for the Self Employed to Get a Mortgage
Now, we understand that all this can seem a little daunting to an already busy business owner just to get a mortgage. But you can get experts to help to ease the burden and provide guidance for navigating through the whole process. As an Agent I have worked with different lenders and know their expertise and ability to assist. I am always glad to refer clients to a good lender.
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