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Mortgages for the Self-Employed: How Complex Can It Be?

Mortgages for the self-employed can seem difficult, but they don’t have to be. In order to get a mortgage as a self-employed individual, you need to show your credit score, your ability to make monthly payments, and your ability to provide a down payment.

In this article, we will go over some of the most common misconceptions about mortgages for the self-employed and dispel them one by one. We also identify what you need in order to qualify for a mortgage as a self-employed person. Check out these tips and find out if you can qualify for a mortgage.

Understanding Mortgages for the Self-Employed

For the self-employed individual, obtaining a mortgage comes with numerous obstacles and hassles. Because lenders typically want to see proof of annual salary in the form of W-2 forms from an employer, it is difficult to prove that you make a sufficient amount of money to service the loan without adequate documentation.

Of course, when we say self-employed individuals, we really mean someone working as a freelancer or independent contractor, or a small business owner that is structured as an LLC – in other words, someone who isn’t receiving a typical W-2 salary. A self-employed owner of an LLC that was structured as an S-corps would theoretically be receiving an employee salary, so they could technically fulfill the requirements more easily.

All of this difficulty for self-employed individuals is because after the subprime mortgage crisis in the late 2000s, strict regulations were enacted to prevent lenders from exploiting high-risk borrowers by signing them up for mortgages with extremely high monthly payments and high monthly debt service ratios. Since then, mortgage rates have remained fairly stable, and you can check the current averages on websites like MoneyWise.

One of these strict requirements is that all consumers applying for a mortgage need to provide two years financial history, which includes not just their credit score, but their history of late payments, and even any outstanding liens or judgments. In order to be able to qualify for a mortgage, you need a well-researched list of lenders, as well as a financial plan that can potentially pay for your new mortgage.

The Most Common Misconceptions about Mortgages for the Self-Employed

The first misconception is that it’s impossible for self-employed individuals to obtain a mortgage loan. It isn’t impossible, it’s just extremely difficult. Lenders want to see evidence of annual income in the form of tax returns and W-2 forms. If you don’t have those forms, then lenders will generally expect you to provide proof of income in the form of a bank statement or a yearly profit-and-loss statement (P&L).

The second misconception is the opposite of the first – that you can simply drop a pile of invoice receipts on the bank’s desk, and expect them to approve your loan application. Yes, it is true that lenders would like to see at least some proof that you’re able to pay your monthly mortgage payments – however, when it comes to the amount of proof that’s required, mortgage lenders generally want to see a lengthy history of financial responsibility.

And finally, the last common misconception is that you need a much larger down-payment in order to obtain a mortgage as a self-employed individual. Being able to provide more than the minimum down-payment amount certainly helps your case, but having a sufficient down payment isn’t the determining factor for lenders. Yes, lenders will look at you more favorably if you provide 50% down-payment, but they still want to know you can repay the remaining 50%.

What You Need to Qualify

Exactly what you need is nearly the same as a person who receives a W-2 salary, just different paperwork. You’ll need to provide documents such as:

  • Exact records of your 1099 forms
  • A balance sheet
  • Profit-and-loss statements
  • Proof your debt-to-income ratio is under 40%

Because you aren’t providing W-2 salary forms, lenders will thoroughly examine your business profits to make sure that you’re running a strong business with good projections and financial planning.

What makes it so difficult is the preparation – hopefully, you’ve had a professional bookkeeper all along, who can help you prepare all of these documents in advance. Also, the paperwork has to be meticulously detailed in order to convince the lender that you’re able to pay the mortgage on time, and that you don’t have other delinquent debt.

Conclusion

As you can see, obtaining a mortgage as a self-employed individual is not impossible at all, it just takes some very strategic planning and meticulous record-keeping of your financial history.

If you have a good bookkeeper, and are willing to show proof of your annual income, debt-to-income ratio, and tax return, then you will definitely have a better chance of securing a mortgage loan.


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