How Much of a Challenge is Being a Self-Employed Borrower?

How Much of a Challenge is Being a Self-Employed Borrower?

Qualifying for a mortgage as a self-employed borrower can be a bit more complex than for someone who is traditionally employed. This is because lenders typically scrutinize self-employed applicants more closely to ensure they have a stable and reliable income.

Here are some steps and considerations for self-employed individuals looking to qualify for a mortgage:

Make sure you keep good documentation of your income, Tax Returns: Lenders will usually require two years of tax returns (Form 1040) to verify your income. This helps them assess your average income over time. A Profit and Loss Statement (P&L) may also be requested, this is an outline of your revenue, expenses, and net income. These should align with your tax returns. Any 1099s or K-1s: If you receive income from other sources, like partnerships or freelance work, these forms may be required. They look at a stable income history, lenders like to see a consistent or increasing income trend over the past two years. If your income has been fluctuating, it might be more challenging to qualify. The type of business structure you have may also be a factor. If you're a sole proprietor, your personal and business finances are often considered together. If you're incorporated or have a partnership, lenders may have different requirements. You may be asked for additional documentation or clarification about your business, income sources, or tax returns. Be ready to provide this information promptly.

Your credit history will play a part, a strong credit history is important for any borrower, but it can be particularly crucial for self-employed individuals. It demonstrates your ability to manage debt responsibly. Lenders will also look at your DTI to ensure you can comfortably handle your mortgage payments along with your other debts. This ratio is calculated by dividing your total monthly debt payments by your gross monthly income. The amount you can put down as a down payment can affect your eligibility. A larger down payment may compensate for any perceived risk of being self-employed.

You may hear the word “Reserves” which means lenders may want to see that you have enough savings to cover several months of mortgage payments. This shows them that you have a financial cushion in case your income dips.

Remember, every lender has specific criteria and policies, so it's a good idea to shop around and compare offers.