It’s no secret that the economy and workforce are changing rapidly. There are currently 59 million Americans who are self-employed in some capacity, and the freelance economy is growing three times faster than the traditional workforce (Fortunly.com). As this aspect of the workforce and economy changes, we wanted to break down what it takes for people who are self-employed, independent contractors, and business owners to get a mortgage.
Who is considered ‘self-employed?’
- You own 25% or more of a business
- You do not receive W-2 tax forms
- You receive 1099 tax forms
- You are a contractor or freelancer
The good news is that self-employed borrowers have access to the same mortgage programs and rates as any other borrower and that in Michigan, Treadstone can help. Self-employed borrowers are still held to the same standards as any other applicant on factors that go into your approval such as credit score, credit history, debt-to-income ratio, and your savings and assets.
However, because you are not a traditionally employed W-2 worker, it can be more paperwork intensive to prove your net, taxable income. So, you may need to take a few additional steps and provide some extra documentation. If you plan ahead, get all of your documentation in order, and work with the right lender, getting a mortgage should be straightforward – even as a self-employed worker.
What documents do you need?
- Two years of personal tax returns
- Two years of business tax returns
- Business license
- Year-to-date profit and loss statement
- Balance sheet
- Signed CPA letter stating you are still in business
- Business bank statements
Proving your taxable, net income
To qualify for a mortgage, lenders need to see at least two years of self-employed income to understand your overall financial situation. Typically, lenders average the past two years of taxable income and break it down by month to determine your net income, which is not as straight-forward as a W-2. Unfortunately, without a thorough two-year history, it can make mortgage approval trickier. Essentially, lenders want to ensure that you have stable and consistent income that is likely to continue.
Another thing to consider is that while business write-offs may help reduce your taxes, they don’t exactly do you any favors for getting a mortgage. Write-offs can reduce the income considered in the mortgage approval process, so although underwriters can add some expenses like depreciation back in to determine your net income, it can be helpful to keep business expenses separate from personal expenses to make deciphering your taxable income easier. This will give underwriters a clearer picture of your finances.
Other than your income, lenders also consider such factors as credit score, credit history, debts and debt-to-income ratio, and savings and assets, just like they do for every client, to determine your credit worthiness and ability to successfully manage a mortgage.
What lenders want to see from self-employed borrowers:
- Income stability
- The location and nature of your self-employment
- The financial strength of your business
- The ability of your business to generate sufficient income in the future
Can you get a joint mortgage (have a co-borrower) if someone is self-employed?
If you plan to get a joint mortgage, and one of the borrowers is “traditionally” employed, you may be able to leave out the self-employment income all together. If one borrower qualifies for the loan based on their income alone, you could choose not to include the self-employed borrower in the process.
Plan ahead to make the mortgage process easier
Because of the little bit of extra work and documentation it may take to get approved for a mortgage being self-employed, planning ahead will only make the process smoother, simpler, and better.
- When you decide to move forward with the mortgage or refinance process, contact your accountant to get the proper documentation if you don’t already have it on hand.
- Have an experienced loan officer in your corner from the start to guide you through the process.
- Work with a lender who specializes in mortgages (vs a banker who offers hundreds of financial products but doesn’t specialize in any 1 of them). Mortgage lenders have the infrastructure and expertise to move quickly through a self-employed borrower’s application, whereas general banks may not have as much experience.
- As with any borrower regardless of employment type, things like a larger down payment, a low debt-to-income ratio, great credit, and working with an experienced and invested loan officer are all beneficial as you go through the mortgage process.
Whether you are a first time home buyer or a veteran real estate investor, don’t let your status as self employed stop you from moving forward on your next purchase. Our team is ready and available to help you navigate the process of buying a home and securing financing as a self employed borrower.
Don’t let your status as self employed stop you from moving forward on your next purchase!