Mortgage qualification is pretty straight forward for a standard W-2 employee, but what happens when you are your own boss? Although the process may look a bit different for self-employed borrowers, there’s no need to worry. We have all of the resources that you will need to make your application process seamless.
What Do We Look For?
When you begin the mortgage application process as a self-employed borrower, your loan officer will look for the following to prove that you are a strong candidate for a mortgage loan:
- Income stability of the borrower
- The financial strength of their business
- Demand for the product or service offered by the borrower’s business
- The likelihood that the borrower will maintain a steady flow of income over time
Documents Needed For Income Verification
If you prepare the necessary documentation mentioned below, your lender will have all of the tools they need to streamline the income verification process:
- The last two years of tax returns for you and your business, including all schedules and supporting worksheets
- A year-to-date profit and loss (P and L) statement which could include a Schedule C or Form 1120S
- Current balance sheet
- Letter from your accountant noting that you are still in business
- Copy of your current business license or corporate filings
- Bank statements (two months) for your business and personal bank accounts
- Letter of explanation for uneven or declining business income
- Partnership tax returns and/or schedule K-1
If you have been self-employed for less than two years, Fannie Mae guidelines will allow qualification with a minimum of 12 months of self-employment history. Eligibility for this exception is permitted when the borrower has proof of earning a greater or equal amount of income in a similar field before they became self-employed.
Ways To Help Strengthen Your Application
In addition to providing the necessary documentation, there are several ways that you can prepare to improve the strength of your application.
Minimize Tax Deductions
Self-employed borrowers often try to write off as many business expenses as possible to get a larger refund when tax time comes around. However, lenders evaluate your income after tax write-offs. Therefore, your reported income looks lower than it actually is when a lot of expenses are deducted. Consider writing off fewer expenses two years before your mortgage journey to help with qualification.
Lead With A Strong Credit Score
An excellent credit score will always make a borrower’s file more attractive to an underwriter. Work hard to improve your credit score before you begin your home financing journey.
Reduce Your Debt-To-Income Ratio
Debt-to-income ratio (DTI) plays an essential role in mortgage qualification for all potential buyers. When your DTI is low, there’s less risk that you will not pay back your loan.
If you have a debt-to-income ratio of 50% or above, try to reduce your debts before applying for your mortgage.
We will use the income that you report on your taxes to calculate your DTI. Therefore, if you write off a large number of business expenses to lower your taxable income, but have a lot of credit debt, your DTI will be higher.
Keep Your Business and Personal Expenses Separate
When we evaluate your debt, we are looking at your personal debt. If you keep your business expenses separate from your personal, the reporting process is simplified.
Maintain Excellent Records
Before you meet with your lender, work hard to maintain meticulous records of income and expenses. Gather all the required documentation mentioned above and keep it organized and stored in a safe place.
Make A Larger Down Payment
Larger down payment funding means that there’s less money needed to borrow upfront, which will decrease the chance that the borrower will default on their loan. Consider saving more for your down payment to strengthen your file, and improve your chances of qualification.