Steps to getting a mortgage when self-employed
If you're searching for mortgages for self-employed individuals -- whether to purchase a home or to refinance your existing mortgage loan -- follow these steps.
- Apply with lenders most likely to work with you. Some mortgage lenders specifically offer mortgages for self-employed workers. And if you have an established relationship with a local bank or credit union, that lender may also be worth considering -- it may be more likely to lend to you because you're a current customer.
- Provide thorough financial records. Any borrower needs to provide extensive documentation of income. This is especially important when you apply for mortgages for self-employed borrowers.
You'll need your 1099 tax forms and several years of tax returns to demonstrate your yearly pay. Lenders also need proof your business earns steady income, so be ready with recent bank statements and a profit-and-loss statement. - Be persistent. The first lender or two may not approve your loan. Or they may charge high rates. Take your time. Rate shop with multiple mortgage lenders to find a loan that's right for you. Traditional borrowers need just a few quotes to compare, but you may need to apply with five or six mortgage lenders -- if not more -- for the best chance at a good rate.
How to calculate your self-employed income for a mortgage application
One of the trickiest parts of figuring out how to get a mortgage when self-employed? Not all of your income necessarily counts.
Generally, lenders look at net income on Schedule C of your personal tax returns if you don't file a separate tax return for your business. Net income is your income after business expenses. In some cases, lenders add back in income from certain tax deductions, such as for business use of your home, or depreciation. But most deductions can't be added back in. Your net income determines whether you qualify for a mortgage loan.
If your business files separate tax returns and you receive a portion of company profits or losses, your lender may also want to see K-1 tax forms. Lenders look at net profit. If you aren't the 100% owner of the business, only your portion of the company's income counts in determining if you qualify for a loan. Lenders usually add back in depreciation, but most other tax deductions and any outstanding business debt obligations count against your income.
If your business income hasn't been steady over the past several years, lenders usually use a two-year average. If your business income is declining, a lender may only give you credit for the most recent year's income.
That means if you made $150,000 two years ago but $100,000 last year, the lender is likely to count at most $125,000. Because your earnings have declined in this scenario, your lender could also use$100,000 as your income in deciding whether to give you a loan and what amount you can borrow.
Mortgages for self-employed borrowers can seem more complex due to the amount of income verification needed. But if you can gather all the necessary paperwork, you should be able to verify your self-employed income.