There are many advantages to being self-employed, but unfortunately, an easy path to securing a home mortgage isn't one of them. It's not impossible to find a good loan at a good rate — it just takes some extra thought, planning and maybe looking beyond the traditional financing methods.
According to Bankrate.com, approximately nine million Americans are self-employed and many earn a very good living. The problem from a lender's perspective is that because self-employed workers are able to take many more business-related tax-deductions. The result is that their annual income tax returns don't accurately reflect how much independent workers actually take home. Pava Leyrer, training and development manager at Northern Mortgage Services in Michigan, says the way her company qualifies self-employed homebuyers doesn't always agree with the IRS. Self-employed workers are caught between the desire to maximize their tax savings with the IRS and show more income to prospective lenders.
If you're self-employed and wondering what you can do to present the best possible financial picture to a lender there are a few things you can do to get ready.
Leyrer advises the self-employed to take more time than most borrowers before buying a home. She suggests taking fewer business tax deductions if you can two years before you're ready to buy and make sure you don't co-mingle your business and personal finances.
Have your paperwork ready
Like all other mortgage shoppers, self-employed borrowers will need good credit and a low debt-to-income ratio. In addition, you should also give lenders banking and brokerage statements and proof of assets and debts you own or owe. Real estate site Zillow says you'll also need to show personal and business income tax returns for the past two years and a quarterly profit and loss statement if you have one. Different lenders have different paperwork requirements for self-employed borrowers, so be prepared for a range of varying requirements.
Demonstrate annual Increases
Bankrate says it's understood that a self-employed business owner will experience seasonal income highs and lows. But what lenders won't like seeing is a year-over-year decline in income. Be prepared to show lenders that your business is continuing to grow.
Be ready for a few obstacles
As a self-employed borrower, finding a reasonable lender is going to be a challenge. According to Investopedia, the self-employed often pay higher interest rates than are advertised. The best rates are reserved for borrowers who can demonstrate steady verifiable income and have excellent credit scores. Because a self-employed worker may not have proof of steady income, finding a loan at an attractive interest rate will take some work.
Consider unconventional options
Understand that since the subprime mortgage crisis, it's harder for self-employed individuals to obtain mortgages from understandably gun-shy banks. If it's difficult to find a conventional mortgage, there are some alternative loans you could consider. Investopedia suggests a Stated Income/Stated Asset Mortgage (SISA) or a low-documentation loan that the bank won't attempt to verify. What they will do is try to verify your sources of income, so be ready with a list of clients and other sources of cash flow such as income producing investments. The lender may also ask you to submit additional IRS forms along with your tax returns.
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