Being self-employed is a little bit different than getting a W-2 or a paycheck every other week from an employer, especially when it comes to buying a house and taking out alone. But, just because you’re self-employed doesn’t mean it’s too difficult to get a home loan and buying a home is definitely an option. However, there are some different rules and regulations when it comes to being self-employed and applying for a mortgage. If you are part of the 42 million Americans that are self-employed, this pertains to you. Lenders are primarily concerned that all applicants have the ability to consistently repay the mortgage. Here are some things to know before jumping into the process.
What you’ll need.
Lenders want to see about two years of steady income. This is a basic requirement for just about any mortgage but those the get a W-2 or a paycheck can prove this a little bit easier. However, other factors such as how much savings you have, your down payment, and debt to income ratio can alter that to your requirement. Self-employed applicants will need to show as much income history as possible. Lenders usually require self-employed borrowers to show at least two years worth of income through tax returns or even bank statements. Lenders want to see a list of any existing debts and assets and usually a profit and loss statement.
Debt to income ratio.
Lenders usually will not provide a loan if your debt to income ratio is greater than 43%. This means that if more than 43% of your income is going toward paying off debt each month, lenders may not approve you for any more debt. It’s important to keep your debts down to a manageable level, much more than simply exceeding 43%. If you can keep your debt to income ratios below 36%, it looks even better.
Credit score and history.
Lenders also look at your credit history, report, and score. If you have a credit score of over 700, you are considered low risk and have a better chance of getting the home loan with better terms. This is to say that anyone under 700 can’t get a loan, but terms and interest rates may be higher. Depending on the mortgage and the lender you choose, applicants with a credit score of even 580 or lower may still be able to get a home loan.
What about business expenses?
A lot of self-employed professionals have a lot of business expenses that they can deduct off their taxes, which means that the actual income looks smaller than what is deposited into their bank statement. Most underwriters look income after expenses, which means your taxable income could be too small to qualify for the mortgage you want. This is where a bank statement or stated income loan is really the best option. Lenders look at bank statements to see how much money actually gets deposited into your business or personal accounts. This can be a great alternative to tax returns and when you just can’t prove a lot of income.
If you are self-employed and you’re looking for a home loan, give me a call today. I have a lot of lenders that specialize in home loans for the self-employed and can put you in touch with a local mortgage officer to answer any questions and to get you the mortgage you truly want.