Self Employed & Getting a Mortgage – What You Need To Know

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If you are self-employed buying a home, there are special considerations you should consider when applying for a mortgage. In addition to the standard requirements, the effects of the COVID-19 pandemic have changed the subscription requirements. Further documents are required to prove the stability of the independent business income used for qualification. If you prepare properly, the process shouldn’t feel overwhelming.

How can a self-employed borrower prepare for the buying process?

A self-employed borrower must provide documentation that goes beyond a salary and a W2. The key is to keep good records and separate business expenses and assets from personal ones.

Some lenders consider self-employment to be a higher risk. It can be more difficult to document the stability and continuity of the self-employed income that is used to qualify for a mortgage loan. Therefore, your lender can look into this carefully during the underwriting process. Some lenders have an interest rate adjustment for self-employed borrowers; Elevations Credit Union doesn’t.

The self-employed income is credited with additional surcharges on the net income (according to expenditure), while a W2 borrower is qualified on the gross income. The self-employed can be shocked to find that their net income is so low after factors like business expenses and tax write-offs. Net income is very different from gross sales. Since Fannie Mae, Freddie Mac, and the FHA base loan decisions based on net income, this is the number to focus on.

As you prepare to buy a home, you want to understand yours Debt-Income Ratio (DTI). DTI is the sum of the income-related payments used to qualify, including the new housing benefit payment. Most loan programs want to ensure that your total housing costs and all other debts do not exceed 45% of total qualified income. For self-employed borrowers, this can be even less depending on the needs of the particular lender. Please contact a tax and / or accounting professional to determine what steps you can take to improve your DTI.

What documents do you need to provide to your mortgage lender?

Documentation is a big part of the process, and it is critical that all of the components are required by your lender. Take note of the required documentation if you are thinking about buying a home years in advance. Generally, you’ll need to present the last two years of federal tax returns filed, for both personal and business purposes. You are also required to provide income statements and balance sheets and business accounts for the current year. A bank statement of three to twelve months may be required to document business deposits and expenses.

Some of the information and documents you should compile include:

  • Tax identification number
  • Schedule C.
  • Time plans.
  • Form 1120-S, 1120, or 1065 (if applicable)
  • K-1
  • Profit and Loss Account (P&L)
  • Confirmation letter for self-employment of a CPA
  • Invoices if you are an independent contractor
  • References
  • Business license
  • References or letters from customers

You may need to include proof of bond insurance and professional association membership, as well as documents showing your Doing Business As (DBA).

What additional documentation might be required to determine the impact of the pandemic on your company’s revenues?

In order to determine the impact of the COVID-19 pandemic on your business, lenders may need additional documentation. This may include quarterly profit and loss statements or financial reports, monthly or quarterly trends added to the current profit and loss accounts, and / or additional bank statements for the entire period of the current year.

What’s the best advice for self-employed borrowers?

Keep personal and business income / expenses separate, open a separate business and personal bank account, and work with a reputable CPA who can help you keep good records and provide tax advice.

If you have any questions about applying for a self-employed mortgage, contact one of our helpful mortgage loan officers today to arrange a face-to-face, phone, or video meeting.


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