Self employed Buyer tips to get approved for a loan!

Real Estate

Self employed Buyer tips to get approved for a loan!

Self-Employed? 8 Keys to Getting Approved for a Mortgage and Buying a Home

Your office might be a built-in desk in the corner of a spare bedroom, a downtown co-working space — or the front seat of your pickup. The Bureau of Labor Statistics reports there are 15 million self-employed workers in America living the dream, being their own boss. Sure, it can be a struggle, but there is great satisfaction in seeing your very own business grow from a sketch on paper to profitability.

Until you try to get a home loan. Self-employed people have to work a little harder to score a mortgage. Here’s how to crack the code on getting the credit you deserve.

Documentation is the difference

For the self-employed, the actual loan process is the same as for others, says Jason van den Brand, co-founder and CEO of online mortgage company Lenda.

“You’re still going to start with a rate quote, you’re still going to fill out an application, you’re still going to sign paperwork, and you’re still going to be required to provide documentation,” he says.

Down payment, debt-to-income and credit requirements are the same, but, van den Brand says, the difference in documentation requirements is significant. While employed applicants provide W-2 forms as proof of income, self-employed borrowers will need to show their 1040 tax returns, including all schedules.

“That’s where it gets tricky,” van den Brand says. Typically, self-employed tax filers write off a bunch of expenses that W-2 employees can’t. “And so their actual net income after all the write-offs actually is a lot lower than it would be otherwise.”

That makes it harder to qualify for a mortgage, because it hurts your debt-to-income ratio. The key is to show a net income, after write-offs, that meets the debt-to-income ratio that lenders prefer, usually ranging from 36% to 43%. Don't let this discourage you self-employed Buyers get pre approved for a loan every day!

Improve your odds of being approved:

Hedayat and van den Brand say that if you’re self-employed, you can make several moves to enhance your chances of getting a home loan:

Register and license your business.
Pay yourself a W-2 wage rather than an owner’s draw. Ask your Accountant about this to see if it applied to you.
Lower your debt load.
Reduce your tax deductions.
Keep separate business and personal accounts.
Maintain good records. Van den Brand suggests using tools like QuickBooks to help track and classify income and expenses — and to generate a profit and loss statement, which lenders often require from sole proprietors.
Consider making a larger down payment, perhaps by tapping your IRA or 401(k).
Consider working with another small business, such as a local credit union or mortgage company, Hedayat says. That’s where you could benefit from a factor rarely in play in lending today: a relationship.

Getting approved for a mortgage may take some extra steps but it is possible and is done every day! In fact reports show that in an average month, 22% to 24% of the mortgage loans Lenders make are to self-employed borrowers.

I work with the best Mortgage Professionals in the business, call me and I can refer you to a Pro to get the process started!

Paula Pantaleo
(303) 908-7088
Contact Me To Sell or Buy Your Next Home