How to improve chances of getting a home loan when self-employed

Question

I'd like to apply for a home loan so I can purchase a property in Dallas TX that I'll rent out.

I own a small IT Consultancy business in MD and have a good credit score. However, I've been self-employed since 2010.

From what I heard, banks and credit unions tend to decline loan applications from self-employed people because we're viewed as high-risk.

Are there any best practices or tips on how I can improve my chances of getting a home loan?

Stephanie P. · Answer

@Joshua Massari

Did you find what you were looking for?

Stephanie

Joshua Massari · Answer

@Stephanie P. I’ve been looking into bank statements loans which would be much easier for me to prove income. I will be acquiring the property as a primary residence so hopefully I can find someone with a reasonable LTV and lower down payment. Thanks for the info

Stephanie P. · Answer

@Joshua Massari

You can add depreciation back in when going full doc. Incidentally, it isn't necessarily the lenders but the guarantors like Fannie and Freddie that put out the conforming guidelines. Lenders lend and the gse's guarantee the loan as long as you underwrite to their guidelines.

You could go with a bank statement loan, but the ltv on an investor loan won't be much, if at all, better than the no income verification loans I mentioned earlier.

Joshua Massari · Answer

@Stephanie P. - What you are saying is completely true and also ridiculous that most lenders only look at taxable income. Smart savvy investors/ business owners know how to reduce tax liability by writing down depreciation and other tax deductions that are not actual cash expenses. This leaves you with more cash in hand at the end of the year and IMO making you a better "less risky" candidate for a loan. But lenders don't see it this way because it does not fit the norm of their lending guidelines. Do you have any suggestions besides a no income verification loan for buyers in this situation? These loans require a larger down payment and make the COC return of the investment not worth it in most scenarios.

Harjeet Bhatti · Answer

@Philip Williams I have handle bigger tax return than which you mention above. If I am not able to help always will get email or call from me. Sometime we have overlays as a lender its does not mean if I can't help that no one can. There will be lender out there who will be able to help you.

As a self-employed borrower you need firm answer from lender which you should get it from your lender.

Stephanie P. · Answer

Kareem

Banks don't decline self employed people because they are viewed as a high risk.  Banks decline people who have erratic income, huge swings that indicate their business is unstable.  Banks decline people that are self-employed, not because their tax returns are too complicated, but because they take massive deductions (legal, I know) which reduces their adjusted gross income.

Incidentally, banks turn down W2 borrowers that take massive deductions for business related expenses which also reduces their adjusted gross income.

I would suggest you look on BP to find an investor friendly local lender that you can sit down and have a coffee with.  Have them review what you've got going on and ask for direction.  There are numerous Meetups in your area that you could attend that would help.  Without diving too deep into your situation, I would also suggest you work to stabilize your income if you want to go the Fannie/Freddie route.  If stabilization is not possible, the next answer would be to buy a property using a no income verification loan so you don't need your tax returns.  Yes, they're a little more expensive, but the borrower pays for the elevated risk.

Best of luck

Stephanie

Philip Williams · Answer

Yes that is a huge problem and don't let anyone tell you differently! I am sure lenders like @Harjeet Bhatti have a much more positibe view of lenders than the average self employed investor. When I go to apply for a home mortgage and drop off my hundred page tax return I don't even get a call back 90% of the time. Not even a courtesy hey this is too complicated for us just complete silence. So the fact that guidelines are the same makes no difference most not all but most lenders want regular w-2 income.

Kareem Aaron · Answer

My income is erratic: sometimes I pay myself and sometimes I don't (so that the money stays in the business for R&D). So my W2s from year to year fluctuate drastically, from close to $100K/yr to almost nothing. Is this a problem?

Harjeet Bhatti · Answer

@Kateem Aaron Guidelines are same for all whether self-employed or salary---lender look for income, liabilities and assets . You are self-employed for long time shouldn't be problem.