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Oct 11, 2020 | By
Getting a Mortgage When Self-Employed

Getting a Mortgage When Self-Employed

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.

Who is considered self-employed?

  • Borrowers who have a 25% or greater share in a business or partnership
  • Independent contractors who receive 1099s - this includes Uber and Lyft drivers

How to get ready for the process

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.

Why?

Because the income used for qualifying - is your net income after tax-write offs.  

Documentation required to determine what the income is

  • Last two years of tax returns for the business and your personal tax returns, all pages
  • K1's - if applicable
  • YTD - profit and loss statement

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.

Besides the income

The rest of the documentation is standard. Here is a list:

  • Last two months of bank statements and asset statements
  • Drivers license or ID (unexpired)

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.

Credit

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.

Down Payment

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.

The bottom line

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.

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