Getting a mortgage can be tricky for anyone. However, if you are self-employed, you may be judged on a different set of criteria than other borrowers who are employed by somebody else. How can a self-employed person get a mortgage?
Your Income is Averaged Over the Past Two Years
To determine your qualifying income, your profits from the past two years are averaged together. For instance, if you made $100,000 two years and $50,000 last year, you would be considered for a loan based on an income of $75,000. However, if you have income from investments, child support or any other verifiable and steady source, that may also be added to that number.
Income Documentation
Those with a standard job, earning a steady wage from a company, can usually provide income documentation by presenting pay stubs and W-2s. If you’re self-employed, however, some aspects of income verification can be different. An Austin home loans specialist says self-employed borrowers will need their business tax returns for the past two years as part of their income documentation. You will need to demonstrate that you’re actively and legitimately employed.
Your Income Is Based on Income After Deductions
While you may save money on your taxes when you write-off a business expense, it may lower the amount of income that a lender is allowed to consider. If you put $10,000 into a 401k in a year when you made $100,000, you would only have made $90,000 in the eyes of the lender.
Therefore, you may have to decide whether to forego a tax deduction to make it easier to qualify for a home loan. In some cases, a lender may be able to add back certain large one-time expenses or other expenses at their discretion. Deductions related to the depletion or depreciation of an asset may also be added back to your yearly self-employment income.
Finally, it may be a good idea to avoid commingling funds whenever possible. For instance, you should use your business credit card to buy a business computer. This offers a clearer financial picture to lenders considering your application.
Make Life Easier By Incorporating
If you incorporate, you will be considered both an owner and an employee of your company. You will receive regular wages and a W-2 at the end of the year that you can show to lenders. Since you are a separate entity from your business, it will be no different as if you were employed by a company that you did not own.
Just because you are self-employed doesn’t mean that you can’t get a home loan. However, you should be ready for more scrutiny than other borrowers may receive. If you do work for yourself, it may be a good idea to work with a bank that knows you as it could get you the best rate on the loan.
