Home Loans for the Self-Employed
Being self-employed can be a really great situation for people who need more control over their work environments or who simply work better by themselves. For the most part, it’s just like working other jobs, except that you’re the one making the big decisions. Unfortunately, for a long time a lot of lenders didn’t see it that way -- instead, you were considered a high-risk borrower.
Times, they are a-changin’. Today’s prime mortgage scene is open and welcoming to those with self-employment income. It’s not all smiles and hugs all the time, you’ll still need to jump through some extra hoops to get closed, but the massive number of people who have moved into the gig economy aren’t totally out of luck.
You Can Get a Prime Mortgage
It wasn’t that long ago that it practically took an act of Congress to get a prime mortgage approval for anyone who had a small business or worked as a freelancer. The banks were scared of them, which, in hindsight, is sort of ironic if you don’t think too hard about it. In the last couple of years, they’ve been coming around. This may be because at least 16 percent of the workers today are part of the gig economy.
Regardless of the reasoning, banks are easing up on the requirements for many self-employed people. This isn’t a repeat of the no-doc “liar loans” predicament that preceded the market crash, instead, banks and mortgage insurers are just acknowledging that consistent self-employment is as reliable an income source as any.
For example, Fannie Mae updated its underwriting guidelines for self-employed borrowers just this year; FHA did the same recently. This means less paperwork, less hassle and fewer delays for your transaction.
You’ll still need to bring some paperwork into the equation, but as long as your credit is good, there won’t be additional hurdles to clear. Get these documents ready before you walk into your nearest mortgage broker or banker’s office:
Two years of your most recent signed personal tax returns.
Two years of the most recent business income tax returns if it is a corporation, S-corp, LLC or partnership.
An original copy of your business license.
Evidence that you own at least 25 percent of your business (if not indicated on license).
Additional proof of income stability may be required, so it might not hurt to bring these with you:
Last three months of bank statements for your personal bank accounts.
Last three months of bank statements for your business bank accounts.
Profit and loss statement.
Instead of looking for some sort of obscure mortgage that may well be a really bad deal for you, start by looking at prime lending. It’s easier than ever for a self-employed person with a proven track record to qualify for them.
Other Tips for Securing a Mortgage
When you’re close, but it’s still no cigar on securing a mortgage, you may have to start thinking a bit more out of the box. It’s what you do anyway, isn’t it? Instead of giving up your mortgage hunt, try these tricks:
Bring more money to the table. Provided you have an untapped source of funds, put them to work. Your standard IRA, SEP IRA or solo 401{k} should have an option for you to either borrow against it for things like home purchases or will let you take out a big chunk for a down payment. The more you can bring to closing, the lower your risk and the happier the bank will be.
Pay down some debts first. It’s not unusual for a self-employed person to be swimming in debt, especially right after a big expansion or acquisition of new equipment. If your debt to income is pushing 43 percent, you definitely need to pay down something. Not only will this make you a much better loan candidate, it’ll improve your credit score because your credit utilization will be lower.
Use spousal income. If you can’t get the job done on your own, your spouse may be able to take the front seat in the transaction. Note that the purchase and all legal documents will be drafted in your spouse’s name, but in most states, any property acquired during a marriage is considered co-owned in some manner. You can have your name added to the title or a beneficiary deed created after your closing to make sure you’re protected should anything happen to your spouse.
Phone a friend. It’s not easy to ask someone to co-sign a loan, but sometimes it’s necessary. This is a really good option if your problem is little credit experience or that your income has been ramping up, but you can’t yet prove that to underwriting. Plan to refinance in a few years, though, because that co-signer is on the hook as long as the mortgage they signed on exists.
Still Puzzled About Borrowing While Self-Employed?
Home.Loans is all about answering the questions you really want to ask but might be afraid to. Instead of worrying that you won’t be approved for a mortgage, contact us and let us help you find the perfect loan for your financial situation.