How to Qualify For A Mortgage If You Are Self-Employed
Published: 02/25/2013 by Kevin Mulligan
Being your own boss is a great thing. You set your hours, you make the decisions, and you drive your business forward. If you are successful it can be unbelievably satisfying.
There's only one real problem with self-employment: what if you decide to buy a house and need a mortgage?
Is it even possible after the Great Recession to get a mortgage if you are self-employed? How many hoops do you need to jump through?
Qualifying for a Mortgage When Self-Employed
It is absolutely possible to qualify for a mortgage if you running your own business and self-employed. There are just some extra hoops you can expect to jump through to make it happen. Some of the following may seem like a ton of documentation; just remember that you are applying for a loan worth thousands of dollars. The lender is well within their rights to verify you are capable of – and likely to – repay the loan.
You dropped your taxes off with your accountant months ago, but it is time to track down those returns once again. In the past you could provide copies of the returns to the mortgage lender, but now they are required to have you use Internal Revenue Service Form Form 4506-T (Request for Transcript of Tax Return). This lets the IRS directly send your tax returns to the mortgage lender to make sure you don't forge any of the documentation.
Tax returns are often a part of the documentation for a W2 employee's mortgage application as well, but with self-employed individuals this is one of the only true ways to gauge your income.
Of course there is a slight problem with using your last two year's tax returns if you just started your business. Even if you have thousands in the bank the mortgage lender can deny your application because you can't show you have the income to pay off the loan.
There is also the problem of taking as many business expenses as you can to show a lower taxable income to the government. That, in turn, shows the lender a lower income which means they may not approve you for a loan.
Proving your income stream can help by doing a month by month profit and loss statement. Essentially, any documentation, whether it be income statement or tax return, will improve your position to be approved for the mortgage loan.
The lender is going to look for nice consistent income rather than one huge sale for $60,000 in one month, zero income for 9 months, and then another sale of $10,000 in the last month. Having a consistent income of $4,000 per month would be better even though you would have significantly less income.
Use a Co-Applicant
Sometimes it just isn't possible to qualify on your own. If you started your business within the last two years or haven't shown a true profit yet, you are pretty much out of luck. You can try using a co-applicant (and their income documentation and credit score) to qualify for the mortgage. Obviously this is best done if it is a spouse. There may even be some instances where it makes sense for only the co-applicant to apply for the loan because your business is showing losses and might scare the lender off.