How To Get a Mortgage When You Are Self-Employed

When buying a home, the first step is to work with a trusted lender to obtain mortgage financing. If you are a regular employee and have been on the job for several years, have good credit, solid income, and not much debt, this should be a seamless process. Particularly if you have bank statements, tax returns, and paycheck stubs close at hand. However, for those of us who are self-employed (read Realtors) and receive a 1099 from Uncle Sam, financing the purchase of your home can be a bit more involved. That is not to say it’s impossible. Whether you own a food truck, landscape, or paint houses for a living, here are some things to consider about applying for a mortgage when you own your own business, big or small. 

THE BASIC REQUIREMENTS:

• Loan application
• Credit deep dive
• Income and Assets Evaluation (You will need two years of verifiable income as an independent contractor.)
• Debt to Income Ratio Assessment

When you have a salary or a set income and you are not an independent contractor you can submit your current salary for the last 2 months  and be approved for a mortgage loan. As an independent contractor is no matter how much money you bring in that first year, you have to additionally prove consistency. You will need at least two years of verifiable income in order to obtain a traditional mortgage loan.

The lending institution will require many of the same documents they ask for from those of traditional employment. Proof of income, banking, and tax records, etc. They will run a hard credit check and look at debt-to-income ratios as well. The part that tends to get sticky is when you run your own business but haven't kept accurate records. 

Say you run your own landscaping business and have become lax with record keeping. The neighbor asks to be added to the grass-cutting schedule, but you still haven’t collected payment or sent any invoices. You know they’re good for it! After all, you have lived next door to them for 25 years. Becoming lackadaisical with your business dealings can make it that much harder for you to do that cash-out refinance you have been talking about to put in that inground pool this summer. 

Keep your ducks in a row.

• Always keep records updated. This includes invoices, accounts payable and receivable, profit and loss statements, etc.
• Always keep your business expenses separate from your personal expenses. No intermingling!
• Keep licenses, DBA, LLC, etc. easily accessible for your lender to review.
• Have business insurance information readily available.

If you don’t keep your own books, make sure the CPA or trusted financial partner you choose will be easily accessible when applying for financing. They will be a valuable resource when gathering this information. If you haven’t spoken to them since this past April, you may want to give them a heads-up for any information you may need. Being proactive is key so you’re not scrambling for documents. 

If you know anything about the mortgage fallout of 2008 as depicted in the film The Big Short, gone are the days of stated income loans (if not for a precious few credit and income-worthy folks).

Be prepared to have all of your loan worthiness scrutinized so you can go into loan consideration confidently. Talk to your trusted accountant or financial advisor about anything you’re uncertain of. Soon you’ll be hearing those three beautiful words from your loan underwriter: “Clear to close.”