How being self-employed affects your ability to get a mortgage

August 29, 2016

Unfortunately for those who are self-employed, lenders often view people who work for themselves as less reliable borrowers than those who bring home a steady paycheck from an outside employer. But even if you don’t receive an annual W-2 form, you can still qualify for a mortgage. Here are some factors that lenders often consider:

Your last two tax returns – Lenders want to see your tax returns from the last two years, which they consider to be proof of income. They use these figures to determine how much money to lend you, i.e., what monthly payment you can be relied upon to make.

Business expense deductions – One of the best benefits of self-employment is the ability to deduct business-related expenses on your tax return. However, that can turn into a detriment when it comes to applying for a mortgage, because when employers look at your tax return for proof of income, the number they see may not accurately reflect the amount you can afford to pay on a mortgage. Some lenders may consider deductions in determining the amount of your income, particularly if you took large, one-time deductions that are unlikely to recur.

Your history of self-employment – Your chances of qualifying for a mortgage will go up if you can show that you have made a steady income through self-employment for an extended period, and especially if your income has steadily risen during that time.

Don’t commingle your business and personal finances – Keeping your business and personal finances separate helps lenders get the most accurate picture of your financial situation. Additionally, it can help establish that you are not personally responsible for business debt, which could cause concern for a lender evaluating your ability to make mortgage payments.

Your credit score – Lenders look at every borrower’s credit score, but if you’re self-employed, it’s extra important to make sure you have the highest credit score possible. Because lenders perceive self-employed borrowers as a higher risk, they tend to offer higher interest rates to borrowers who work for themselves. A high credit score can help convince a lender that you are not a high-risk borrower.

Your down payment and additional savings – Lenders may require larger down payments and increased additional savings from self-employed borrowers. The savings gives lenders some assurance that if you have a low-income month, you will still be able to make your mortgage payment.

Low debt-to-income ratio – Lenders like borrowers with a low debt-to-income ratio. For self-employed borrowers, a low debt-to-income ratio can help persuade lenders that you are not at greater risk of default. Therefore, you should pay off as much debt as possible before applying for a mortgage.

A co-signer with a W-2 income – Having a co-signer with a traditional job that results in an annual W-2 form can make it easier for a self-employed borrower to get a mortgage.

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