Being self-employed comes with a lot of liberty and benefits. But what do you do when you're planning to get a mortgage?
Borrowers who are regular w2 employees have an easier time qualifying for a home loan than someone self-employed.
Lenders typically view a self-employed borrower as a risk, which means the income guidelines to qualify are challenging. Still, the necessary criteria to get approved for a loan is the same.
Our loan experts shared their top tips on how to get a mortgage if you're self-employed. Let's go ahead and explore what steps you need to take for the best outcome.
What is going to be the toughest challenge?
Determining what your income is!
As a self-employed borrower, you most likely take full advantage of the tax write-offs that are allowed by the IRS. Which means the monthly income is going to be lower than expected.
Because the income used for qualifying - is your net income after tax-write offs.
If you've been in business for a minimum of five full years, underwriting will only need one year of tax returns from both business and personal; also, a copy of your business license will be required.
Getting this documentation ready before applying for the mortgage will make the process faster and easier for you.
The rest of the documentation is standard. Here is a list:
There may be some additional requests, depending on your situation.
For example, if you've had a bankruptcy, the discharge documentation may be needed.
Or, if you currently own a property, a copy of the mortgage statement and homeowner's insurance may be needed.
The loan officer working on the file can provide a complete list.
The general rule says that you must have a minimum score of 620.
The credit score requirement varies for each loan program.
If purchasing a home for more than $510,000, a credit score of 640 may be required.
The amount required will depend on the loan program. The ideal down payment is 20%, but lower options are starting as low as 3%. There are even some $0 down options like the VA loan or the USDA loan. FHA home loan has a 3.5% down payment requirement.
Our pro advice is to get all your documentation ready before you start the mortgage process. It will definitely help make the process easier for you and the loan officer you are working with.