The mortgage process can be difficult for many people to navigate, but for the self-employed it can be even more of an issue. When shoppers don't earn salaries in the traditional way – that is, simply receiving a paycheck from an employer on a regular basis – financial institutions will often institute some rather stringent income verification requirements that can complicate the mortgage application process.
It's worth noting that from their side of the transaction, it makes sense for lenders to be a little cautious when dealing with mortgage applications from self-employed individuals, according to U.S. News and World Report. They will need to consider how viable that applicant's income is on an ongoing basis – after all, a mortgage typically lasts decades – and at the same time, it can be more difficult for institutions to verify a person's income claims if they are self-employed.
"A W-2 employee usually sees consistent wages from year to year," Scott Scribner, a real estate agent and board member of the National Association for the Self-Employed, told the site. "The self-employed borrower often experiences fluctuations in annual income, which can make it difficult for mortgage lenders to predict future income."
With these issues in mind, would-be homebuyers who are self-employed will typically need to do a little more to make sure their applications are approved, according to Investopedia. In addition to being able to provide more documentation about their finances, it's also wise for those applicants to make sure they have also done more to boost their credit scores (especially by paying down any outstanding credit card balances they may carry) and have the ability to make a sizable down payment.
Furthermore, the longer a person has been self-employed and been able to successfully provide for themselves and their families, the more likely a lender might be to believe the applicant has established a track record of reliability, the report said. Put another way, those who are relatively new to being self-employed may have more trouble getting approval on a mortgage application than someone who has been doing it successfully for years.
There may be some good news
However, it's worth noting that federal laws recently changed to make some aspects of the mortgage application process easier for the self-employed, according to The Mortgage Reports. For instance, applicants may now only be required to provide one year's worth of income documentation instead of one, and income can be calculated differently for business owners who don't draw a direct salary from their own companies.
In addition, those who hold both a standard job, as well as receiving income from other "moonlighting" work they do, will not have to provide proof of the latter as long as their other salaries qualify them for standard debt-to-income ratio calculations and the like, the report said.
As with anything else in the mortgage process, it's often a good idea for self-employed shoppers to do plenty of research and prep work, and keep lines of communication open with lending professionals so they understand everything that's expected of them.
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