If you’re self-employed, getting approved for a mortgage is more complicated than getting approved with a traditional job paying W-2 income. There are usually few key differences that self-employed applicants should prepare for in advance to make the process smoother.
Have Your Tax Returns Ready
Before even thinking about applying for a mortgage, self employed applicants need to make sure their last two years tax returns are in order. If they don’t, they’re setting themselves up for rejection.
Self-employed applicants also need to remember that taxable income is what’s used to qualify for a mortgage. If your business makes $100,000 in gross revenue but also claims expenses of $95,000, you’re going to have a hard time getting a loan with $5,000 in personal income.
Calculate Your Income Beforehand
Self-employed borrowers should learn about how their income will be calculated. To figure self-employed income, lenders simply take the total adjusted gross income figures (AGI) from the last two years tax returns and divide by 24. The resulting average monthly income is then compared to the minimum debt-to-income requirements (DTI) for the mortgage program being used to determine if the applicant qualifies.
The minimum debt-to-income ratios required for most mortgage programs are the same for both self employed and W-2 applicants, except in the way the income itself is figured. Learning about the specific debt-to-income requirements for available loan programs will save lots of confusion. Once you know that, a debt-to-income calculator can help you estimate your eligibility. You may also want to research income guidelines for various mortgage programs.
- Conventional Loan Requirements (Good Credit)
- FHA Loan Requirements (Marginal Credit)
- VA Loan Requirements (Veteran Loans)
- USDA Loan Requirements (No Down Payment Loans)
Take Care of Your Credit
It’s vital for every mortgage applicant to take good care of their credit score. The best interest rates go to the borrowers with the highest scores, regardless if they’re self-employed or have W-2 income.
It’s also important to pay bills on time and check your credit score periodically for errors and changes. Generally speaking, borrowers with the best credit scores end up with conventional loans while borrowers with average credit usually end up using FHA loans or another government-insured program.
Be Ready For Lots of Paperwork
Finally, self-employed applicants should be prepared to fill out and submit lots of paperwork and be completely forthcoming with the lender about all their financial information. This includes submitting tax returns, bank statements, corporate documentation and anything else that’s requested. The applicant will also be required to complete an IRS Form 4506-T, which allows the lender to get their tax returns directly from the IRS.
