If you’re self-employed 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 car. 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 simple idea to profitability.
Those who are self-employed are often surprised when they apply for a mortgage and try to get a home loan learning that they have to work 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 loan process itself is the same as it is for others. You’re still going to start with a rate quote, fill out an application, complete and sign paperwork, and you’re still going to be required to provide documentation.
Down payment, debt-to-income and credit requirements are the same, but, 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.
This is where it gets tricky, self-employed tax filers write off a bunch of expenses that W-2 employees can’t. As a result their actual net income after all the write-offs tends to be 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%.
You May Pay More for Your Mortgage
Because some lenders consider self-employed applicants to be higher-risk borrowers, you may pay more for your mortgage.
If you are a self-employed borrower, you have to make a decision, are you prepared to pay a little extra for the money, in a slightly higher interest rate? It’s usually worthwhile because good credit leads to good credit. With a solid payment history, you might be able to refinance at a lower rate later.
Improve Your Odds of Being Approved
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.
- Lower your debt load.
- Reduce your tax deductions.
- Keep separate business and personal accounts.
- Maintain good records. We recommend 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. That’s where you could benefit from a factor rarely in play in lending today: a relationship. A smaller bank is more likely to consider working with you if there’s the opportunity to pick up your business and personal banking business.
It’s Not Impossible
If you’re self-employed, you have to acknowledge that the reality is you’re starting at a disadvantage. It’s part of the price you pay for calling your own shots, for being your own boss.
While getting securing a mortgage may be more difficult for self-employed borrowers, it’s not impossible.
If you, or someone you know is considering Buying or Selling a Home in Columbus, Ohio please contact The Opland Group. We offer professional real estate advice and look forward to helping you achieve your real estate goals!
The Opland Group Specializes in Real Estate Sales, Luxury Home Sales, Short Sales in; Bexley 43209 Columbus 43201 43206 43214 43215 Delaware 43015 Dublin 43016 43017 Gahanna 43219 43230 Grandview Heights 43212 Hilliard 43026 Lewis Center 43035 New Albany 43054 Pickerington Powell 43065 Upper Arlington 43220 43221 Westerville 43081 43082 Worthington 43235
