How to Get a Mortgage When You're Self-Employed

The following is a guest post about how to get a mortgage when self employed. If interested in submitting a guest post, please read my guest post policy and then contact me. Today’s article is from Brian Carey.

There are many advantages to being self-employed. You don’t have a formal “boss”. You have flexibility with your schedule making it easier to juggle home and family responsibilities alongside your business. In many cases, you get to work from home and a lot of personal benefits derived from the business are tax deductible.

However, obtaining a mortgage if you’re self-employed can be considerably more challenging than if you’re a W-2 employee.

This is not to say that it’s impossible, or even unlikely, that you can obtain a mortgage if you own your own business. In fact, if you have the proper documentation, operate a business that is in good financial health, and can demonstrate an ability to pay back the loan, you’ll likely find that you can buy that dream home that you’ve been ogling over.

Here’s how you can obtain a mortgage if you’re self-employed.

Have a good credit history

It may sound almost Orwellian, but to banks and lending institutions, you’re still just a number. That number is your credit score.

If you don’t have good credit, you face a high hurdle in obtaining a mortgage no matter how you generate your income. The primary qualifying factor for anyone, whether self-employed or not, is a demonstrated history of paying back loans.

Know what documentation you need to provide

Paperwork requirements will vary from bank to bank and from lending institution to lending institution. Find out in advance what documentation you need to provide, and make sure that you have it handy.

Of course, the underlying requirement here is this: before you even apply for the loan, make sure that your business accounts for every penny spent and earned. A good accountant is indispensable in this case. You’ll need to ensure that you have all of your financial i’s dotted and your t’s crossed. The more detailed your financial documentation, the more likely it is that you’ll look like a responsible business owner and the better your chances of obtaining a loan.

While we’re on the subject of documentation, you should know that getting a mortgage based on stated income is extraordinarily difficult these days. If you were hoping to get a loan on that basis, please understand that it is virtually impossible. You’ll always need documentation to verify your income.

Have a low debt-to-income ratio

If you’re a business owner, then you should already know the importance of maintaining a low debt-to-income ratio. You’ll find that other business managers, including those who work for lending institutions, understand the importance of a low debt-to-income ratio as well.

Ideally, your debt-to-income ratio should be below 41%. If you have a very strong business model, with a history of sales growth and documentation to verify that growth, then you might get away with a debt-to-income ratio as high as 45%.

Take the tax hit

As a business owner, you’re probably savvy enough to know that you want your net income to be as close to $0 as possible. This limits your tax liability.

However, it also limits your ability to get a mortgage. In short, lending institutions want to see positive income. They don’t want to see a bottom line that is close to (or less than) $0 for every reporting period.

With that in mind, it might be to your advantage to quit claiming certain deductions and allow your net income to be reported as a high, positive number. Sure, you’ll end up owing the IRS a little extra money, but you’ll also look much better on paper to people who are contemplating whether or not they should lend you $200,000 for a mortgage. Ask yourself this, is it worth it to save a few extra dollars in taxes but deprive yourself of a prime piece of real estate because your numbers look so weak? Probably not.

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