During the past several years, many turned to entrepreneurship to survive the economic downturn and job loss, but how does this impact Qualifying for a Mortgage When You’re Self-Employed? In fact, working for yourself has become the reality for millions of Americans. Enjoying the freedom from dress codes, specific work hours and income limitations of regular jobs, “business owners” qualify for a host of tax breaks that reduce their bottom line and consequently, their provable income. The freedom is great, but presents a new challenge of Qualifying for a Mortgage When You’re Self-Employed. This blog is about charting a path to a successful close to buying your next home for the self-employed.
Since the mortgage industry bases credit-worthiness on provable income, using W-2 forms and tax returns, qualifying for a conventional loan may prove difficult for many self-employed would-be homeowners.
Since conventional lenders follow prescribed formulas in proving income and credit-worthiness, most mortgage underwriters only look at the after-tax and post-deduction income, resulting in a far lower provable income than most entrepreneurs or self-employed workers believe expresses the reality of their situation. In a few cases, certain lenders allow specific deductions to be added back into your income including some one-time investment expenses, depletion or deductions for business use of your home. But for the most part, qualifying for a conventional loan is more difficult for the self-employed buyer with an irregular income.
While a conventional loan (salable to government-controlled agencies such as FannieMae and FreddieMac) may not be an option for you, some investors see an opportunity and are funding smaller lenders that offer loans outside these restrictions. For these loans, the risk is higher, so to hedge their investment, these loans typically have a higher interest rate and require a down-payment of at least 20 percent and sometimes more, or a large portfolio, or really great credit.
The bottom line
If you’re newer at the self-employed lifestyle but know you want to buy a home in the near future, you’ll need to start now to position yourself to qualify. Here are the best practices to incorporate into your business and personal life to set yourself up to be approved:
Finally, don’t wait until you want to buy a house to start getting your financial house in order. If may take several months to up to two years to create a provable paper trail for yourself that will help you when Qualifying for a Mortgage When You’re Self-Employed.
For questions on your situation and real estate goals, contact us. We can meet to discuss important steps to take now that will prepare you for your next home purchase.
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