Introduction
The mortgage industry has changed a lot over the last few years. There used to be a huge gap between the ways that self-employed and employed borrowers got approved for mortgages, but now there are more options for both groups. You can still qualify for a home loan if you're self-employed: it just takes some planning and communication with your lender. Here's what you need to know about taking out a mortgage if you're self-employed:
Keep two years of tax returns
When you apply for a home loan, the lender will ask for two years' worth of tax returns. If your business is new and you don't have any profits yet, they will want proof that it's been operating for at least two years and can provide documentation such as bank statements or invoices.
The lender may also require copies of other records such as bank statements, invoices and profit-and-loss statements in order to verify that all income has been reported properly on your taxes. Be sure to include these items when submitting documentation related to self employment so that there are no gaps in their understanding of how much money comes into the business each year (or month).
Good credit scores
If you're looking to buy a home, it's important that you have good credit. A lender will take into account your income, assets and liabilities when deciding whether or not to give you the loan. But they also need assurance that if something happens with your business or finances during the term of the mortgage, then they can still be repaid by selling off assets such as real estate or other investments.
That's where having an excellent credit score comes in handy! A borrower who has an excellent rating means he/she has demonstrated responsible borrowing habits over time--and lenders want this kind of person as their customer because they feel confident in getting their money back at some point down the road.
Down payment from retirement accounts
You can withdraw funds from your retirement accounts to use as a down payment on a home. This is not considered liquid and must be used for the purchase of your primary residence only, so make sure you have other sources of cash available if needed.
The amount that you can withdraw depends on how much money you have in your 401(k) or IRA and how long it has been there:
- If it's less than three years - You can take out up to $10,000 without penalty (and pay taxes on it). Any withdrawals after this point will incur taxes and penalties based on what age you are when taking them out (see chart below).
Provide your previous two years' bank statements
- Provide your previous two years' bank statements.
- You can provide these in paper or electronic format, but they must be from a bank that you have been using for at least one year, and not just the one you are applying with.
- Your account number should be included on each statement so we can verify it matches up with what's in our system.
Have a strong debt-to-income (DTI) ratio to qualify for a mortgage.
Debt-to-income ratio is a calculation of your monthly housing expenses versus your gross monthly income. It's a factor in qualifying for a mortgage and it's also used to determine the interest rate on your loan.
The mortgage industry has had a facelift for self employed borrowers.
The mortgage industry has had a facelift for self employed borrowers.
An example of this is Non-QM home loans.
Historically, the mortgage industry has excluded self employed borrowers from qualifying for mortgages. The reason? To be eligible for a home loan you need to have regular income and this was difficult for many people who work freelance or own their own business.
But now there are new rules which mean lenders can use other types of evidence to verify your income when you apply for a home loan - including using previous statements from your accountant or tax returns instead of earnings statements from employers (known as W2s). This means that even if you don't have an employer who pays into Social Security Insurance (SSI), it doesn't mean that getting approved for financing is impossible!
So, if you're self employed and have been looking for ways to get a mortgage with no W2s or P60s, it's time to celebrate! There are new rules which means lenders can use other types of evidence to verify your income when you apply for a home loan.
Conclusion
The good news is that you can still get a loan. You may need to get your finances in order before applying for a loan, but once you do, there are many options available for self-employed borrowers.
