Self Employed? How to Get a Mortgage
Getting a mortgage
for self-employed workers can sometimes be a little harder, but not impossible.
It will take additional time, effort and patience to accomplish. Here’s why. The
companies that underwrite mortgage loans request more information from a self-employed
person in order to qualify for a home loan. The more you understand about the process
of getting a mortgage loan, the easier it will be for you to secure a home loan.
Most mortgage loans
use guidelines provided by one of three organizations: the FHA (Federal Housing
Administration), Fannie Mae (Federal National Mortgage Association, or the VA (Veterans
Administration). In the case of the self-employed worker, these guidelines are very
similar.
To apply for a loan,
a self-employed worker will be asked to provide five different items of information.
These include:
- A history of two to three years of self-employment.
- Verification that you own at least twenty-five percent of
the business.
- A record of your income for the previous two years. (The
lender will calculate an average income.)
- An estimate of your potential income in the years to come.
- Records showing that the business has had no significant
declines during the previous two to three years.
Here is the bottom
line. The lender wants to know if you have enough money to pay for a mortgage. As
you can see, the guidelines used to evaluate a self-employed worker are similar
to the basic guidelines required of salaried workers. However, the methods are different.
Lenders use a salaried
workers gross income in the loan qualification process. On the other hand, a self-employed
business must show the gross income to the business and to the owner(s). The lender
will make a very careful analysis of the federal income tax returns and schedules
to determine the net income to the self-employed owner.
In addition to the
tax information, the lender will analyze the strength and potential income of the
business to determine credit worthiness. Keep in mind, the longer you have been
self employed successfully, the easier it will be to get a home loan.
There are many new
types of home loans that come on the market each year. Many of these are directed
at the self-employed. The lenders are making a concerted effort to give you the
lowest interest rate and down payment available. In addition, they are striving
to reduce the amount of paper work required for your home loan.
If you business has
had tax write-offs during the period the lender is analyzing, this may significantly
reduce your income (in their eyes). The lender is interested in borrowers that have
the money to pay their home loan and their other obligations. Be sure you work with
a lender that uses a little common sense in analyzing your tax information.
If you are just starting
a new business, the lender will look at your previous job record, your skills, how
long you’ve been working, etc. Then, they will try to determine that your move to
self-employment was a positive and profitable decision.
One more point… if you happen to
have had a bad year recently that does not mean you cannot qualify for a loan. Bad
years occur because of health problems, death, divorce, etc. If you have been in
business for several years successfully, you still have a good chance of qualifying
for a home loan.
As you can see, if
you are self-employed, the methods used to determine your credit worthiness are
different. Work closely with your real estate agent and lender to get the best advice
for your specific situation. Although it may take longer than normal, you can qualify
for a mortgage loan if you’re self-employed.
Just be patient and do your homework.
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