Here are the things you need to know to get the best mortgage from the best lenders when you’re self-employed.
Prove Your Earnings
Whenever you apply for a mortgage, you'll have to prove your earnings. If you're a salaried employee, you'll just need to show 6 to 12 months of personal tax returns and W2s, but for the self-employed, the burden is greater. Different lenders have different requirements, but the majority will want to see 2 years' worth of tax documents.
Before the credit crunch in 2007, applicants who were self-employed were able to apply for a ‘self-certification’ mortgage. They didn’t need to prove their earnings, only to declare how much they earned. Unfortunately, many borrowers inflated their regular earnings and ended up defaulting on payments because they didn’t earn as much as they claimed. Now, there’s no possibility of getting a self-certified loan – you’ll have to qualify for a regular loan by proving your self-employed income.
Consider Your Business Structure
Not all types of self-employment are the same in the eyes of the mortgage lender. There are 3 main structures for your business, and each has a slightly different effect on the way that lenders consider your application.
If you're a sole proprietor, your business structure is pretty simple. The most important part is how much profit you're making, and that's what you'll need to show the lender when you apply. However, you're personally liable for any debts that you incur as a business, which means that your personal assets stand to be seized if your business fails. This can make mortgage lenders nervous, and they will want reputable proof that your business is solid and isn’t likely to fail.
If you work in partnership with one or more other people, your setup is similar to a sole proprietor. Each one of you is personally liable for the whole business, so if your partner makes bad decisions without consulting you and causes the business to fail, you'll still have to pay the debts he leaves behind. This is concerining to mortgage lenders, and they'll want to see proof that your business has a steady, positive cash flow.
Limited Liability Corporation (LLC)
When you turn your business into an LLC, you’re separating between your personal and your business liability. This means that you’re no longer personally responsible for your business’s debts, and lenders feel reassured that your personal financial profile isn’t affected by any bad business decisions.
How to Qualify for a Mortgage When You’re Self-Employed
Qualifying for a mortgage when you’re self-employed is still possible, but you’ll find it all goes more smoothly if you keep these 5 tips in mind.
1. Hire an accountant. You might be able to keep on top of your finances yourself, but having an accountant shows that you are financially responsible. Lenders are also reassured by seeing that a qualified CPA is overseeing your business finances.
2. Keep your books in order. Letting your business's financial documentation get out of hand can preclude you from succeeding in your mortgage application. File your paperwork correctly and hold on to all of your tax returns and relevant documentation so that you can produce it when the time comes.
3. Maintain a good credit score. As well as looking at your business’s health, lenders will also examine your personal financial status. It’s important to keep your credit ratings high to qualify for the best mortgage rates.
4. Don’t declare too many expenses. When applying for a mortgage, self-employed borrowers need to walk a fine line. You usually want to declare as many expenses as possible so as to maximize your tax savings. The trouble is that lenders only consider your post-tax income when considering your mortgage application. That means that if you made too many deductions, your business would appear to be making far less money than it actually is.
5. Don’t mix business and personal. This is good advice for your self-employed career in general, but especially when applying for a mortgage. For example, if you buy expensive equipment for your business using your personal credit card and you're paying in installments, it will show up as personal debt and affect your debt-to-income ratio.
What Documents You’ll Need
When you apply for your mortgage, you’ll be asked to show more documentation than a salaried worker. Different lenders will ask for different documents, but here’s what you’re likely to need to provide:
At least 2 years of personal tax returns, including form 1099, form W2 if you pay yourself a salary, and Schedule C, D, E, and F
At least 2 years of business tax returns for your company, including all of the relevant Schedules, K-1 forms, 1120 corporate tax returns if you own an LLC or other corporation, and 1120s for general partnerships and S-corporations
A list of your debts and assets
A year-to-date profit and loss statement for the current year
A signed letter from your accountant attesting to your business’s stability
If you own an LLC, get written consent from the other owners to grant access to the business financial records
Why You Should Consider a Mortgage Broker
A mortgage broker can be helpful for every home buyer, but they are particularly useful if you’re self-employed. They'll help you compare the best lenders and offers for the home you'd like to buy. Some advantages are:
Mortgage brokers are more likely to know the smaller, independent lenders who take a more holistic view of your financial standing and are more inclined to give you a mortgage.
Because you’ll have to provide a lot more documentation than a salaried borrower, a mortgage broker can also help you gather your documents together and make sure you have everything in order before you apply.
Mortgage brokers probably know about the best options for self-employed applicants that you couldn’t discover on your own.
When you're self-employed, mortgages can seem insurmountable, especially without self-certified loans. Fortunately, with the right paperwork and proper record taking, you can get a great mortgage and own a home and a business too. Read these in-depth reviews of leading mortgage lenders for more information and to begin finding quotes and mortgage rates that will suit your lifestyle.