I work for myself, how do I make qualifying for a mortgage smoother?

You own your own business, and now you want to explore owning a new home.

You’ve made it this far on your own through dedication to your work. To afford a new home, you deserve a mortgage that works just as hard as you.

As you know, working for yourself means you’re both the employee and the employer. Serving both roles includes managing and documenting both your personal and professional income, expenses, and taxes, among other things.

If you take the same care with your mortgage application, Homefinity’s professionals can help you smoothly secure a new home, with a loan you can afford.

We’ve outlined the steps to help you understand and prepare both your personal and professional finances, as well as what loan options to consider, and how to secure the most affordable home loan for your situation.

Where to start before you apply

Are you financially ready?

• Know your finances.
  Knowing your monthly budget and credit score can help you determine how much home you can afford. To make sure you’ll qualify for a loan that fits your needs, it’s also important to have stable, consistent, and ongoing income.
  
  With proof of stable finances, a lender will see your loan as a good investment. However, if there are more risks for the lender, there will be higher costs for your mortgage.
  
  Understanding the following areas of personal finance, will help you start to calculate how much home you can afford and see what you’ll need to qualify for a mortgage.

• Your credit score.
  Typically, the higher your credit score, the lower your interest rate for your home loan. Credit score requirements fluctuate based on the loan type and terms. Connect with a loan officer for specific credit requirements.
  
  Using a free site like CreditKarma, CreditSesame, or CreditWise can be a quick way to get an idea of how you’re doing with your credit. But, just keep in mind that when you go to qualify for your mortgage we’ll need to request your actual credit report and score, which will give us “official” credit scores and the full details of your credit history.

• Your income vs debt.
  When looking at your credit score and monthly budget, pay close attention to the amount of debt you carry compared to the amount of consistent income you earn. This determines your debt-to-income (DTI) ratio, which is your monthly expenses divided by your gross monthly income. If you have enough consistent income to pay the added cost of a mortgage, you are more likely to get approved. For self-employed homebuyers, proof of stable income with room to take on a mortgage is critical in securing a loan. If for example your income fluctuates from month to month, or year to year, the lender will likely look at the average of your income for the past two years. To learn more about your DTI ratio and how it will effect your loan talk to one of our loan professionals.

• Your down payment.
  Typically the more money you can put down on a house, the cheaper your ongoing monthly payments will be. If you put less money down, then you may take on higher monthly payments to cover costs such as mortgage insurance premiums. For example, if your net income appears low because of business deductions, you might want to offer a larger down payment to reduce your monthly mortgage costs.
  
  The down payment for a house can range from as low as 3%. If you want to purchase a $200,000 home, that could mean a payment upfront of about $6,000. This gives you options in deciding what you can afford upfront, compared to what you can afford over the lifetime of the loan.

Prove your stability

Applying for a mortgage is a standard process for both a self-employed and a W-2 salaried employee. However, as a self-employed person, the unique finances that are involved in owning a business require additional documentation to prove your financial stability. A lender will need to see that you’ve had stable, consistent income that is ongoing.

Being prepared with the right documentation will help you secure the best value and interest rate for your home loan. This could include:

• The past two years of personal tax returns, possibly including IRS Form 1099 from clients, or W-2s if you’re paid through your business
  • If you’ve only been self-employed for one year, instead of two or more, you may still be eligible if you have prior experience in that field and your income is at least as much as you earned in that field previously.
• The past two years of business tax returns, including schedules and supporting worksheets
• Permission for the lender to request IRS transcripts for tax returns
• Two to three months of bank statements for your personal and business accounts. More could be needed, depending on the loan program chosen.
• A year-to-date profit and loss statement for your business
• A business license
• A list of your assets and liabilities

Do your prep work

The more prepared you are, the smoother your loan process will go. 

To show your business’s credibility, have letters or emails from a certified personal accountant or clients.

Work on separating personal and business expenses so the lender can clearly see how your money comes and goes.

Understand how deductions affect your overall income and taxes, if possible, in the years leading up to buying a house. Business expenses may be beneficial in reducing your taxable income. However, this will also decrease your net income, which might mean you can only be approved for a lower loan amount. There are some exceptions to this, and in some cases, the tax benefits outweigh the mortgage benefits.

Because being self-employed can be so unique from person to person, it’s important to find out what you need to prepare, document, and calculate for your specific situation.

Do you qualify for special programs?

There are several special circumstances and government programs that can make your home purchase more affordable. Learn whether you’re eligible.

• If you’re a veteran you can use your VA benefit
• If you have a lower credit score or need a low down-payment, an FHA loan might be the best fit

Outside of these specific situations, a self-employed homebuyer will often qualify for a conventional loan.

What options do you have with a conventional loan?

With their flexibility, conventional loans are a common choice for self-employed home buyers. Although a higher credit score is needed to qualify for a conventional loan, it presents several options for determining your down payment, closing costs, monthly payments, and length of your mortgage.

Conventional mortgages meet the down payment and income requirements set by Fannie Mae and Freddie Mac, which help fund the US housing market. Conventional loans also follow limits set by the Federal Housing Finance Administration (FHFA).

Features

• Most common loan for homebuyers
• Down payment as low as 3%
• No out-of-pocket closing cost option
• Choose fixed or adjustable-rate

Term Options

15-Year 

• Stricter credit requirements
• Lower interest rates
• Higher monthly payments
• Paid off faster

30-Year

• Most common among homebuyers
• Lower monthly payments
• Higher interest paid over time, totaling more than twice the cost of a 15-year mortgage

Requirements

• Credit score requirements can fluctuate, but we can typically find an appropriate loan program or assist you in improving your score
• Downpayment of 3% or more, with 5-10% being typical
• Monthly mortgage insurance payments required if your down payment is less than 20% until your loan-to-value ratio reaches 80%
• Depending on location, typically for a loan no larger than $510,400 to $765,600 for a single-family home

How does home.com by Homefinity work with you?

Now that you have an understanding of how your professional and personal finances can impact your mortgage, let’s find out what loan terms will work specifically for your situation. Homefinity’s professionals work with you from start to finish to secure the loan you need.

1. With a phone call to our loan professionals or a convenient online form, you can start the application process, where we’ll ask questions about your credit, business, and finances to learn about your needs.
2. Your information helps us make the best possible recommendations on what loan options will work best for you, such as whether you qualify for a 30-year Conventional, 15-year Conventional, or an FHA loan. We’ll discuss the options with you, any documentation required, and any questions you have about your situation.
3. Once you feel comfortable with choosing your loan, we’ll help you through the approval process. With approval, we can lock in your interest rate so it won’t fluctuate throughout the process.
4. As you head toward closing your loan, we’ll guide you through every step, updating you at each point in the process with clear details and next steps. Your dedicated loan officer can answer your questions any time.
5. When you’re ready, we can close your loan on the day, time, and place that works best for you so you can get into your new home.

Get Started. Make it home.

Connect with a dedicated loan officer to discuss qualifying for a home loan as a self-employed homebuyer. Apply online or over the phone to start the approval process so that you can secure a loan that works as hard as you do.