Getting a Mortgage When You’re Self Employed

December 1, 2013

Being self employed has its fair share of benefits. You get to be your own boss, make your own schedule, potentially make more money, and you may have a little more control over your career. However, being self employed can also be quite challenging – especially when it comes to obtaining credit.

If you’re self employed and looking to buy a home, you may find that getting a mortgage will require a bit more financial documentation and work during the process.

Here are a few financial tips for getting a mortgage when you’re self employed:

Treat Your Credit with Care

Having good credit is necessary for just about every home loan on the market. There are certain loans that have less strict credit score requirements, but for the most part you’ll need a score of 740 or higher to qualify for the best mortgage rates for a conventional loan. (Exact score requirements vary by lender and loan product. Call 800-634-8616 for details.)

Because self employment income is typically considered higher risk, having a better-than-average credit score can help offset potential risk factors and help your lender feel more secure about approving you for a mortgage.

Keep Organized, Detailed Financial Records

Even with a stellar credit rating, a self employed borrower will most likely need to produce their federal tax returns for the last two years as well as quarterly profit-and-loss statements. This is to help your lender see an established record of your business’s profits and your income from that business. If you’re newly self employed, you may be better off waiting until you have two years’ worth of self employed tax returns. (Talk to a financial counselor or mortgage consultant for more advice on when to apply for a mortgage.)

Be Wise About Tax Deductions

To avoid paying higher taxes, many self employed individuals will reduce their income through writing off business expenses. By doing so, you can effectively reduce your taxable income. However, when applying for a mortgage, your lender will use your tax returns to verify your income, so if you reduce it too much, you may qualify for a smaller mortgage amount than you thought. Also, self employed individuals are typically audited more often than regular W-4 employees, so being somewhat conservative with your deductions can help you avoid the stress and headaches of dealing with the IRS.

Live within or Below Your Means

In addition to your income and assets, your lender will also evaluate your debt-to-income ratio. The DTI tells the lender how much money you earn versus how much money you owe to creditors. By keeping your DTI low, you can show your lender that you don’t have a lot of debt – or if you do, you earn enough money to cover it AND take on the responsibility of a mortgage payment.

Not sure what your DTI is or how to calculate it? This post may be able to help.

Have Cash in Reserve for Emergencies

Your lender would like to see that you have enough money in savings to cover your mortgage payment for several months in the event of an emergency. Because self employed individuals often see their income fluctuate, having a back up fund for your mortgage and/or living expenses will protect you from having to pay your bills late or defaulting on your loan.

If you’re finding it difficult to put money away for savings, you may want to work on reducing your DTI before you apply for home financing.

Keep in mind that these suggestions are for educational purposes only and shouldn’t be substituted for professional financial advice. Reach out to a lending professional or financial counselor in your area for additional information and a personalized consultation.