Are you a self-employed individual dreaming of buying a home? Congratulations on taking this exciting step! As a self-employed homebuyer, you may have unique considerations and questions regarding the process. In this blog post, we will guide you through the ins and outs of buying a house while self-employed. We’ll cover a high-level overview of how to qualify for a mortgage as a self-employed individual to help you embark on this homeownership journey together!
Why Buying A House As A Self-Employed Individual Is Different
Being self-employed offers many advantages, but it also presents unique challenges when it comes to securing a mortgage. Traditional lenders often rely on stable employment history and consistent income streams when approving your loan.
Because your income likely fluctuates as a self-employed individual, and you may face additional scrutiny during the qualification process. For traditional financing solutions, you will need to show that you have been self-employed for at least 2 years. And your income is generally calculated by averaging out the net income earned over the past 2 years (with some allowable adjustments and add-backs). For non-traditional mortgage solutions, alternative income documentation such as 1099s, Profit and Loss statements, and bank statement deposits can be considered, instead.
Understanding these differences and taking proactive steps can help you navigate the path to homeownership successfully.
Mortgages For Self-Employed Homebuyers
Self-employed homebuyers have access to various mortgage options tailored to their needs. Here are a few popular choices:
Conventional Loans
Conventional loans are not backed by the government and typically require a higher credit score and a larger down payment. However, they offer some flexibility with underwriting guidelines and the most competitive interest rates.
FHA Loans
Insured by the Federal Housing Administration, FHA loans are suitable for those with lower credit scores or smaller down payments. FHA loans may require additional documentation to verify income for self-employed borrowers and have rigid income calculation requirements.
Bank Statement Loans
Designed specifically for self-employed individuals, bank statement loans rely on bank statements rather than traditional income documentation to assess mortgage eligibility. These loans provide more flexibility for those with irregular income or large business write-offs.
Qualifying For A Self-Employed Mortgage
Qualifying for a mortgage as a self-employed homebuyer requires diligent preparation. Here are key factors that lenders typically consider:
- Income Documentation: Expect to provide tax returns for the previous two years, including all schedules and business tax filings if you own 25% or more of your business. Lenders assess your income stability based on these documents.
- Debt-to-Income Ratio: Lenders evaluate your debt-to-income ratio, which compares your monthly debts to your income. Minimizing debts and maintaining a healthy ratio will increase your chances of mortgage approval. As mentioned earlier, most underwriting guidelines look at your net income over the past 2 years to establish a stable income trend.
- Credit Score: A strong credit score is important for any borrower, including self-employed individuals. Maintain good credit habits, such as making timely payments and keeping credit utilization low. If your credit score is under 600, you may need to put a larger down payment or keep your debt ratios lower in order to be approved.
Can You Get A Mortgage If You Have Less Than Two Years Of Self-Employment Income?
While two years of income history is a common requirement, some lenders offer options for self-employed homebuyers with one year or less of income history. Working with mortgage professionals like our team JVM Lending who specialize in self-employed borrowers can provide valuable insights and alternative mortgage programs.
Proving Income As A Self-Employed Individual
Mortgage lenders typically require annual tax returns, bank statements, profit and loss statements, and other financial documents like W2s and 1099s to verify all qualified sources of income. Organizing these records and maintaining detailed financial records will strengthen your application and make your experience more seamless.
Fannie Mae and Freddie Mac have stringent guidelines for self-employed buyers that often require multiple documents to prove their income. Lenders now want to make sure that self-employed borrowers continue to operate both viable and profitable businesses and that their level of income is likely to continue.
In some cases, Fannie Mae and Freddie Mac can approve self-employed income with only one year of tax returns. This can be very helpful if net income has significantly increased year over year. For Fannie Mae, this is at underwriting discretion. For Freddie Mac, this is a dependable rule if you have a 5+ year history of being self-employed.
In addition to tax returns, most self-employed borrowers also need Profit and Loss statements for all periods not covered by tax returns. In many cases, these can be self-prepared. But, if taxes were prepared by a licensed CPA, the profit and loss statement must be signed by a licensed CPA.
Will Your Business Expenses Affect Your Mortgage Application?
Lenders consider your net income after deducting business expenses when calculating your qualifying income. It’s important to note that while business expenses can reduce your taxable income, they may also impact your mortgage application. Minimizing both personal and business debts can help improve your debt-to-income ratio (DTI) and positively impact your mortgage application.
Some business deductions and write-offs will not harm your qualifying business income, however. These include “on paper” deductions such as depreciation and amortization expenses, business mileage, and business use of home deductions. These can be added back to your net income figures to improve the total income considered on your loan approval.
Working closely with a mortgage professional who understands the intricacies of self-employment can provide valuable guidance on how to present your business expenses in the most favorable light and maximize your chances of mortgage approval.
Can You Qualify For A Mortgage If I Have A Low Credit Score?
While a good credit score is beneficial, it’s important to note that there are mortgage options available for borrowers with lower credit scores. For example, FHA loans often have more flexible credit score requirements compared to conventional loans. These loans are insured by the Federal Housing Administration and offer opportunities for individuals with lower credit scores or limited credit history.
FHA loans may be a viable option for self-employed homebuyers looking to qualify for a mortgage with a lower credit score, as FHA loans can approve credit scores as low as 560. This does require ample “compensating factors” to offset the higher risk to the lender of a low credit score. These compensating factors include things like larger down payments, proof of additional funds held in reserve post-close, and lower debt-to-income ratios.
Because of nuances like these, it’s essential to consult with a mortgage professional who specializes in working with self-employed individuals to explore the best mortgage options suited to your specific circumstances. They can guide you through the process and help you identify the most suitable loan programs available. Remember, even if your credit score is lower, proactive steps to improve your credit health can still positively impact your mortgage application.
Your Next Steps
As a self-employed individual planning to buy a house, it’s crucial to partner with a lender who understands the unique needs and challenges you face. JVM Lending specializes in working with self-employed borrowers and offers unparalleled expertise in navigating the mortgage process for individuals like you. Our knowledgeable team can provide personalized guidance, explore tailored mortgage options, and ensure a smooth and successful homebuying experience.
Don’t leave your homeownership dreams to chance. Trust the experts at JVM Lending to be your trusted partner throughout the mortgage journey.
Contact us today at 855-855-4491 or email [email protected] to learn more about how we can help you secure the mortgage that aligns with your self-employed status and sets you on the path to homeownership.
