Getting A Mortgage While Self Employed
You probably know by now that getting a mortgage loan for self-employed people may be more difficult than those who work for large companies. It's not impossible. This guide will help you determine what documentation you need to provide a lender. It also explains common reasons self-employed might be denied a loan.
Documents To Show The Lender
You will need to have good credit and a low income-to-debt ratio. Additionally, lenders will require statements from your bank and brokerage accounts and proof that you do not have any other debts. It's the income question that is often a problem for self-employed workers. You can't simply hand over your past pay stubs to the bank like you would working for a large company. You will need to submit your personal and business income tax returns for the past two years to get a loan. Most lenders will use the average of your two most recent years of income. In addition, a quarterly profit and loss statement may be required. Every bank is different, so it's a good idea to contact the bank in advance to obtain a list of materials.
Common Reasons Self-Employed Are Denied A Loan
The biggest reason self-employed are denied loans is because they haven't been self-employed long enough. Lenders will require you to be self-employed for at least two years. Not having enough income is another problem. Self-employed borrowers do not use the gross income to calculate their debt/to-income ratios (DTI). In addition, self-employed people often take more tax deductions than salaried borrowers, resulting in lower net income. This could mean that lenders may not believe you can pay your mortgage on time.
How To Look More Attractive To A Lender
You can increase your chances of getting a loan by ensuring that you have all the necessary paperwork and have been employed for at least two years.
It is important to have plenty of cash. Banks can be nervous about irregular income from self-employed individuals. You'll need to prove that you can make mortgage payments without relying on that income. A savings account should have enough money to cover a year of mortgage payments. An immediate annuity will pay you regular income and allow you to show regular income. Warning: These are expensive and might not be the best option.
Talk to your accountant to ensure that you are showing sufficient income. An amended tax return may be necessary to show more income. You might also consider getting a cosigner and using a lender that has previously worked with self-employed borrowers.
