If you're self-employed, you may be wondering if a mortgage is in store for you. When you can't show conventional income in the form of a steady paycheck, will banks approve you for a mortgage?
The answer is yes! However, you might need to have a higher down payment available, and it's essential to have all of your documentation well-organized for the application process.
Just as with any other mortgage, lenders require specific documentation from self-employed people that apply for a loan.
You'll need to list your debts, assets and federal tax returns.
Qualifying in 2019
For someone that's self-employed, as of 2019, you're likely to be expected to show one or two year's worth of financials (ie. tax returns and profit and loss statements).
One year if your business is in the same field that you previously were employed in or two years if your previous employment is unrelated.
A mortgage applicant that was previously employed as a mechanic with BMW decided to start his own auto repair company. Within his first year of operations, he earned a similar amount of income as he did working for BMW.
In this case, the applicant shows enough stability to provide one year of income statements.
If however, he decided to open up a hair salon, he would need two years of business financials regardless of how profitable the business was in its first year.
Additional Qualifying Criteria
You can also expect lenders to inquire about other business-related factors when approving a self-employed applicant. This extends to the nature of the business, the demand for its products, and a future projection of your operations.
Submitting Your Application
Most applications are initially processed through an automated underwriting service provided by Fannie Mae or Freddie Mac.
While they are both fairly similar, Freddie Mac's Loan Prospector only requires one year of financials, while Fannie Mae's Desktop Underwriter requires two years. As such, you can ask your lender to utilize the software that is more suitable to your situation.
Don't forget that lenders will be considering your total income before taxes, not after. Banks typically gross up 25% of the net income for self-employed applicants to account for taxes.
In certain cases, underwriters can use an alternative method to determine "qualifying" income for business owners. They'll take your taxable income and add back deductions for things that are not cutting into your revenue that year, like for example depreciation. Conversely, they also may exclude any income that is not consistent or ongoing.
Going back to the previous example, let's say the mechanic sells one car at his shop and uses the profits to show higher earnings in his second year of operations. It's likely that the lender will deem the sale to be a rare occurrence and exclude the sale from the applicant's net income.
Most lenders just want to see someone with predictable, stable income. If you can prove that you have that, getting a mortgage will be no harder than if you had a W-2.