Qualifying for a home loan can be somewhat challenging in this volatile and forever changing market, especially for those who are self-employed. Although there are many factors to consider when applying for a mortgage, one of the main qualifying factors is being able to document enough income. For those who are employees of a company, most lenders will require the last two years W-2's and most recent paystubs. If the income is inconsistent or you want to utilize overtime income, bonuses, and/or commission then all that would be required is a written verification of employment, from the employer, breaking down the last two years. However, if you're self-employed here's where it could get a bit challenging because one of the main benefits of being your own boss is tax deductions. This is helpful when it comes to paying less to "Uncle Sam", but can be an issue when trying to verify sufficient income to qualify for a home loan.
Here are the income classifications for lenders:
• Employee: Individual is a W-2 wage earner and receives a paycheck. Taxes are usually withheld from the paycheck.
• Self-Employed: This includes everything else - a sole proprietorship, General Partnership, Limited Partnership, Corporation, S-Corporation. You can also be considered self-employed even if you are a W-2 wage earner from a company in which you have more than 25% ownership interest.
Listed below are 5 Helpful Tips to Qualify for a home loan when Self-Employed:
1) Establish Your Business:
Before applying for a mortgage you want to be sure that you have established your business for at least two years. The main reason is because lenders will require complete tax returns for the last two years to show the stability of your income. They will normally take an average of the last two years if your most recent year's income has increased. However, lenders will go with the most recent year if the income decreased, not take an average. As a good rule of thumb, always report as much income as possible, especially when thinking about purchasing a home within the next few years.
Before applying for a mortgage you want to be sure that you have established your business for at least two years. The main reason is because lenders will require complete tax returns for the last two years to show the stability of your income. They will normally take an average of the last two years if your most recent year's income has increased. However, lenders will go with the most recent year if the income decreased, not take an average. As a good rule of thumb, always report as much income as possible, especially when thinking about purchasing a home within the next few years.
2) Limit Your Business Expenses/Deductions:
If you're getting ready to buy a home within the next 2 years try not to take many deductions. Most lenders can only add back your depletion (line 12 on Schedule C) and your depreciation (line 13 on schedule C), along with your mileage. Typically everything else will be subtracted from your gross revenue or receipts. Ideally, you would want to speak with your loan consultant and your tax advisor prior to filing to find out how much income you need to show in order to qualify for a home loan.
If you're getting ready to buy a home within the next 2 years try not to take many deductions. Most lenders can only add back your depletion (line 12 on Schedule C) and your depreciation (line 13 on schedule C), along with your mileage. Typically everything else will be subtracted from your gross revenue or receipts. Ideally, you would want to speak with your loan consultant and your tax advisor prior to filing to find out how much income you need to show in order to qualify for a home loan.
3) Maintain High Credit Scores:
Although this may seem obvious, it's still worth mentioning. Lenders pull a Tri-Merge credit report, meaning they collectively pull your credit history through 3 credit bureaus (Equifax, Experian, and Trans Union). They each provide a separate score and lenders will use the middle of the 3 credit scores. Ideally you want to have a minimum credit score of 740 or higher to obtain the best finance terms. Doing anything you can to increase or maintain a high credit score is essential for qualifying and getting the best mortgage terms.
Although this may seem obvious, it's still worth mentioning. Lenders pull a Tri-Merge credit report, meaning they collectively pull your credit history through 3 credit bureaus (Equifax, Experian, and Trans Union). They each provide a separate score and lenders will use the middle of the 3 credit scores. Ideally you want to have a minimum credit score of 740 or higher to obtain the best finance terms. Doing anything you can to increase or maintain a high credit score is essential for qualifying and getting the best mortgage terms.
4) Minimize Your Credit Obligations/Liabilities:
The other side of having good credit is to have low revolving and installment debt when applying for a mortgage. This is an attempt to keep your overall debt-to-income ratio as low as possible. Try to have car loans paid off, or at least paid down to less than 10 months of payments remaining (that goes for any installment debt). Make sure student loan payments are minimal or paid off. Don't co-sign for anyone if you're planning on buying a home in the next few years. If so, try to switch out of your credit/name prior to applying. Also, be sure to keep a small revolving balance on credit cards. That way if the lender requires it to be paid off prior to closing it should be attainable without breaking the bank. Under the new mortgage guidelines borrowers are supposed to have a debt to income ratio of 43% or less. I will be posting a blog next week with easy tips for maintaining good credit.
The other side of having good credit is to have low revolving and installment debt when applying for a mortgage. This is an attempt to keep your overall debt-to-income ratio as low as possible. Try to have car loans paid off, or at least paid down to less than 10 months of payments remaining (that goes for any installment debt). Make sure student loan payments are minimal or paid off. Don't co-sign for anyone if you're planning on buying a home in the next few years. If so, try to switch out of your credit/name prior to applying. Also, be sure to keep a small revolving balance on credit cards. That way if the lender requires it to be paid off prior to closing it should be attainable without breaking the bank. Under the new mortgage guidelines borrowers are supposed to have a debt to income ratio of 43% or less. I will be posting a blog next week with easy tips for maintaining good credit.
5) Evaluate Your Assets For Down Payment:
The more funds you have for a down payment, the more purchasing power you have. It will also help your case in underwriting with compensating factors when you have more liquid assets for the down payment. It will help if you can come in with more than 20% down when self-employed. In addition to the down payment it will also help to have roughly 3-6 months of payments in some form of liquid asset. These assets can also be in a retirement account such as a SEP IRA.
The more funds you have for a down payment, the more purchasing power you have. It will also help your case in underwriting with compensating factors when you have more liquid assets for the down payment. It will help if you can come in with more than 20% down when self-employed. In addition to the down payment it will also help to have roughly 3-6 months of payments in some form of liquid asset. These assets can also be in a retirement account such as a SEP IRA.
I've been helping people become home owners and helping people refinance their existing mortgage for over 12 years. I pride myself in giving every single client the absolute best service and mortgage terms available.
For more Information or to get qualified call/text/email or visit my website below:
Cell: 619-250-1937
Office: 858-368-4690
Email: jpollington@aplemail.com
Website: http://www.TheMortgagePlanner.Info
Office: 858-368-4690
Email: jpollington@aplemail.com
Website: http://www.TheMortgagePlanner.Info
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