Self-Employed Loans

What is a Self-Employed Loan?
The Key to Unlock Your Mortgage – Income

The first thing you should keep in mind at all times is that income is the lynchpin to the whole thing. Lenders need to know you’ll have money coming in consistently as a sign you’ll be able to make the payments over time.

However, unlike traditional homebuyers, you don’t have access to a W-2 from an employer proving how much you make regularly. In place of a W-2. self-employed applicants need to provide evidence of the past two years of tax returns. Coming up with this documentation — on top of everything else you’ll need — can be difficult, but it is also worth it. Regardless of how challenging though, getting this documentation together will go a long way as  you apply for a loan.

What you Think You Make, Versus The Paperwork

Once you have gone over the hurdle of getting all your tax returns information in place, comes another significant challenge: reconciling any discrepancies between what you think you make, and what your tax returns say you make. It’s probably the most common issue self-employed applicants have to deal with when trying to get their loan. There’s usually quite a gap between their cash flow on hand (and credits through business accounts) and the amount the government decides you make in net income.

Learn this now: factoring in tax write-offs and business expenses can end up widening that gap significantly! Consider that three of the most popular mortgage programs: Fannie Mae, Freddie Mac, and FHA all base their lending criteria on net income, and you’ll get why this matters. Now that you have your eye on the ball, it’s time to go over the more relevant aspects of the process.

Gathering Documentation

You already know the key thing here: tax returns, so let’s start with that. Gather as much documentation you can on your tax returns for the past two years. Some conventional loan programs only require you to provide a years worth of paperwork, however, to maximize your alternatives you would do well to go the extra mile and get the two years of paperwork.

Beyond that, there’s really not set documentation you’ll be required to present, as these things vary from lender to lender. Some might ask you to  bring 1099’s from anyone who paid you over that period as proof of your stated income. Some might want you to present expenses and accounting records. Suffice it to say, the more paperwork you are able to come up with in this regard, the better.

Additional Documentation

In addition to tax forms, documentation that helps prove you are actually self-employed might be helpful at some point. If possible, gather things that will assist you on this, like:

Business License: Typically issued by the state, city, or county where you conduct your business. It’s important that it contains the name of the company and that you appear as the owner.

Client’s Letters and Communications: Some lenders might ask you to present at least one letter from a client you provided a service to in your self-employment. These must come from legitimate businesses and include contact info, date, and type of the services you rendered.

Personal and Business Bank Statements: Some lenders offer loan programs that accept these types of alternative documentation.

Extra Paperwork: Documents like bond insurance or memberships to professional organizations can also be helpful.

Scheduling a Meeting

Once you have all the paperwork in place, you can move on to meet with your broker or lender. Here, there isn’t such a thing as “too prepared”, as most of the relevant info you can come up with will  help. Depending on the documentation you present, some lenders will take a look at your tax returns and tell you right away your chances of getting approved. Other times, it might take a while  longer.

Organization & Thoroughness

The more organized and ready you manage to have your paperwork for this meeting, the better. On top of your tax info, have any supporting documents for your income at hand. Bringing along cash flows, free online credit reports, FICO scores, and bank statements help you present yourself in the best possible light.

Credit Scores

Having bad credit doesn’t have to be the end of it, as plenty of borrowers will adjust to your needs (Need help finding them? Click here). However, if you have a favorable credit score, you should leverage it! The higher your FICO score, the lower the risk to your lender, and the more chances you’ll get approved as a self-employed borrower.

Getting Ahead of the Curve

If you plan ahead — sometimes, way ahead — getting a mortgage being self-employed can become much more manageable. As stated earlier, most self-employed people encounter issues while applying due to inconsistencies in their net income.

As you prepare your upcoming tax returns, there are a couple of adjustments that might go a long way to help you along:

Write off less than the previous year

Tax write-offs are often behind low net income discrepancies.
Not writing everything off for your upcoming return (if possible) is a good way to offset this.

Clean finances

Keeping your business and personal finances (and respective paperwork) separate can also be a great boon. For example, if there’s equipment you use for your business listed on your personal credit report, clearing that up before applying can help you along.

With this sort of meticulous record keeping and a bit of planning, you can significantly improve your chances of getting that mortgage you need.

The Most Important thing…

You need to remember that while applying for a loan as a self-employed person can be daunting, it is entirely doable! As long as you are prepared, patient, and willing to find the right lender and the right program to fit your situation. After reading this page, you are probably a bit more prepared. And while we can make you more patient, we can certainly help match you with the lender you are looking for!

Click here right now and take a step closer to becoming a self-employed homeowner.