As a business owner, freelance consultant, or independent contractor, buying a home or refinancing can oftentimes be more challenging to secure financing. It can be difficult to prove how much income a borrower has without a W-2 or a steady, consistent paycheck.
Self-employed individuals are able to take advantage of legal tax deductions and write-offs that are allowed by the IRS. Unfortunately, this means that they often show a low net income – or even a loss – on their tax returns, which can make it tougher to qualify for a mortgage. This is why most lenders have stricter rules and generally require more documentation for self-employed borrowers.
However, this does not mean it’s impossible to secure financing for your desired home. If you do your homework, supply the right documentation to verify income and know what to expect, you will be in great shape.
There are four main types of self employment:
- Sole Proprietor (Schedule C Personal Tax Return)
- Partnership (Tax Return Form 1065)
- S-Corp (Tax Return Form 1120-S)
- C-Corp ( Tax Return Form 1120)
If you’re self-employed, the loan approval process will be somewhat similar to that of a W-2 salaried applicant. A mortgage lender will be looking at your credit score and using your credit report to learn your history. This gives them an idea of how well you’ve handled debt and credit in the past.
In addition, it would be useful to lower your debt-to-income ratio, separate business and personal assets, and consider offering a higher down payment (if possible).
Documentation:
When applying for a mortgage, expect lenders to request and review the following documents:
- Personal Federal Tax Return
- Business Federal Tax Return
- Signed Year To Date Balance Sheet for Business
- Signed Year To Date Profit & Loss Statement for Business
- Current Years Business Bank Statements
- W-2’s and Pay Stubs (If Business pays a salary to the owner)
Most lenders will average the previous two years of tax returns to find qualifying income and want to see that you have been self-employed for a minimum of two or more years. Being ready to fully document income through previous years’ tax returns, profit and loss statements, balance sheets and other income verification docs will improve your chances of qualifying for a home loan.
There may be additional documentation needed to verify the self-employment status but can vary case by case, depending on what is
If you are self-employed and need help or have questions about how to secure a loan, please give us a call at (760) 930-0569 and one of our loan officers will be happy to help.
