You own your own business, now it’s time to own a new home. When you are your own boss, getting a mortgage can be a bit of a different process than applying for a traditional mortgage. Here’s your guide to everything you need to know about getting a mortgage as a self-employed homebuyer.
Wondering who is considered a “self-employed” borrower? Most lenders regard self-employed borrowers as someone with 25% or more in ownership interest of a business or is not a W-2 employee. You will file the same application as traditional borrowers, however, when it comes to verifying your assets, that is when you may take the road less traveled.
SELF-EMPLOYED MORTGAGE APPLICATION DOCUMENTATION
If you are self-employed, you will complete the same mortgage application as every other borrower with the caveat of providing additional documentation to establish your income. These documents can help assure your lender that you have the financial stability to absorb the additional cost of a mortgage into your budget. Using a mortgage calculator can help give you an idea of what you might be able to afford.
Since you more than likely aren’t going to have a W-2 to show a lender, you will need to prepare a contractor/self-employed/freelancer income form also known as a 1099 form.
Documents needed to show proof of self-employed income include:
- Two most recent years’ 1099s
- Two most recent years’ business tax returns
- Two most recent years’ K-1s (report of each partner’s share of tax items)
- Shareholder information for S Corporations (Form 1120-S or Schedule B-1)
- Profit/loss statement (Form 1040 or Schedule C)
- Year-to-date balance sheet
Note: If your business has not been in operation for two years, you may need to provide W-2 documentation as well. A PrimeLending loan officer can help you discern what forms you need to provide.
In addition to the above, you may need to provide standard mortgage application documentation which includes:
- Two most recent years’ personal tax returns
- Other income records including, but not limited to:
- Child support
- Alimony
- Social Security
- Disability
- Pension
- Distribution income
- Driver’s license copy
If you have any questions about which forms you need to provide or want clarification, always reach out to a PrimeLending mortgage professional who can help you make sense of the mortgage process.
3 MORTGAGE TIPS FOR SELF-EMPLOYED HOMEBUYERS
If you aren’t sure how to start preparing for your mortgage application, worry not. We’ve rounded up some tips that can help self-employed borrowers get ready to start the mortgage process.
- Keep meticulous records of income and expenses. Proving your income as a self-employed borrower is of the utmost importance to make your mortgage process go smoother. Having a thorough and orderly record of your income and expenses could help you avoid any roadblocks later on.
- Maintain or increase your credit score. Depending on the mortgage you are applying for, the credit requirements will vary. Your credit score will have an impact on what loans you may qualify for, interest rate, and whether or not you will need private mortgage insurance (PMI). That said, some mortgage options offer more lenient credit requirements to provide options for borrowers who have less than ideal credit.
- Pay down debt. Your debt-to-income ratio (DTI) will factor into your mortgage application process. DTI is the sum of your monthly debts divided by the total gross monthly income of your household. Common monthly debts may include credit card debt, car payments or other loans.
While getting a self-employed mortgage takes a few extra steps than a traditional borrower the process can be just as easy. By tracking your income, knowing your DTI, and organizing your financial documents, you can approach buying a home with confidence.
As you continue through your mortgage process, never hesitate to ask questions. Talking to a mortgage professional before you start your application could help save you time and stress. Reach out to your local PrimeLending loan officer to get support from the very beginning of the process.
