As a self-employed business owner, you have a lot on your plate. While running a business and tending to your daily responsibilities, starting the home process might feel daunting. You may have even heard it’s more difficult to secure financing when you’re self-employed – but don’t worry that’s just a myth! While it’s true there are different requirements to qualify for a loan when self-employed, business owners just like you are securing home financing each day.

How Your Self-Employment Income Is Documented in the Mortgage Process

As a self-employed professional (especially if you’re a freelancer or independent contractor), the biggest hurdle you’ll cross during the mortgage process is validating your income. Your Mortgage Loan Originator (MLO) understands your income may fluctuate from month to month and year to year. This does not disqualify you from getting a mortgage, however, your MLO will want to see a consistent trend of steady income from only the last 2 years.

As you begin your homebuying process, your MLO will encourage you to get pre-approved. During this process, they’ll request a series of documents to determine just how much home you can afford.

If you are a business owner, we’ll need the following documents:

  • 2 years of personal tax returns (or 24 months of bank statements)
  • 2 years of business tax returns (or 24 months of bank statements)
  • A copy of your business license or a written statement from a CPA verifying you have been in business for at least 2 years
  • Profit-loss statement from past 2 years

If you are a freelancer or independent contractor, the documentation will include:

  • 2 years of personal tax returns (or 24 months of bank statements)
  • 2 years of business tax returns or W2 or 1099 if available
  • A copy of your business license or a written statement from a CPA verifying you have been a freelancer or independent contractor for at least 2 years

Upon reviewing your documents, your MLO will take the average of your yearly income over the past two years to come up with a baseline number. If you made $70,000 one year and $82,000 the next, your average income will be calculated as $76,000.

If you decide not to use your tax returns for your mortgage application, your MLO will instead need 24 months of bank statements from your primary business bank account.

Other Considerations for Self-Employed Professionals

Credit Score – If your income has a variance from year-to-year, having a good credit score from one year to the next will help you in your mortgage application. As a self-employed professional, your credit score will be an important factor in qualifying for a mortgage; so it is good to check your score at least once a year. There are many applications such as Personal Capital and Credit Karma that monitor your credit score. If you want a more detailed look, you are entitled to an annual free copy of your credit report from each of the three major bureaus (Experian, Equifax, Transunion). You can get it from AnnualCreditReport.

Down Payment – Having a sizable down payment amount can lower your monthly payment. If you don’t have 20% or more for the down payment, don’t worry. Depending on your average income and credit score, you may qualify for the various loan programs available for buyers with little money for their down payment.

Debt-to-Income Ratio – Your debt-to-income ratio is calculated by how much debt you have relative to the money you make year-to-year.  A low amount of debt relative to your income will be a tremendous advantage. Some of the debt that you consider business debt may be considered personal debt, such as a car that you purchased for your business that is in your name. As you prepare to get pre-approved, continue to make debt payments while saving up a down payment for your home.

Tax Deductions – As a self-employed professional, you may write off expenses during tax time to reduce your taxes. While this tends to be a benefit in most instances, when it comes to applying for a mortgage, it will reduce your net income. For example, if your business made $100,000 worth of revenue but wrote off $80,000 in expenses, you will be considered to have a net income of $20,000. This lower amount means you will have fewer options to choose from for a home! This is why we recommend planning ahead at least 2 years in advance as a self-employed professional. If you do not write off expenses for those 2 years, you will be in a better position when you are ready to secure your dream home.

While there are some areas you’ll need to consider as a self-employed professional, getting a mortgage for the home of your dreams is possible! Your Homebridge MLO will walk you through the process and is happy to provide an initial consultation to outline your path to a new home! Connect with a Homebridge MLO in your area today!

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