Getting A Mortgage When You’re Self-Employed

1. Have Your Personal And Business Finances In Check

You can expect your mortgage lender will look at your income as well as the-viability of your business. What does that mean? Well, it means they want to be sure your business has a good chance of surviving, so they can get paid.

They’ll look at things like:

• Where your business location
• Your business is financial viability (this is where it pays to be profitable enough to pay taxes, by the way)
• The current demand for the product or service you sell
• Here’s the big one) does your business make enough to make the mortgage payments.

As an employee, you have a W2 and pay stubs to prove your income. Not so easy when you’re self-employed with no pay stubs to produce. Most small business owners have inconsistent income. Add to that, most of us write off as much as possible to reduce our taxable income, so we don’t exactly “look good on paper.”

As much as it’s great to reduce your taxes, there’s a downside of looking like you don’t make enough money to afford the mortgage payments. Reducing your profit (aka taxable income) also impacts your debt-to-income ratio, which lenders also take into account. The same $10,000 debt looks totally different on a business that has $200,000 in sales and a $75,000 profit vs $200,000 in sales but only $20,000 in profit.

2. Prepare The Documents Like Your Loan Depends On It. Because It Does, It Really Does

You will have to provide the typical personal information as well as the business’ information. Have this stuff ready before you start the application process! Here’s a list of some of the most common documents you will need:

• Past 2-years tax returns (both personal and business)
• Form 4506-T—this gives the lender permission to get transcripts to prove your tax returns. Sorry, folks -they won’t just take your word for it that the documents you’re providing are real
• Business Verification—this includes verification from the Secretary of State or articles of incorporation to prove you are a real business
• Profit and loss statement this helps to show all of your business income and expenses. They will most likely ask for a year to date to start the approval process, then an updated one before closing. This is why it is important to keep your books up to date. Getting this done last minute is not fun for you and is costly if you need help.
• Bank statements. This is personal as well as business to prove what you’ve stated as your income. If you don’t already have a business bank account separate from your personal, you should make this a priority, so you can show your business cash flow.
• Credit report. This is essential. They’ll look at the debt obligations and how good you are at paying them. This helps them decide if you can sustain a mortgage payment.
• Proof of current rent or mortgage. This is to see how big of a jump (if any) you’re making in your monthly payment with a new mortgage.
• Proof of additional income. If you’re self-employed, do you have a part-time job, spousal income, Social Security, or other forms of income? If so, it’s important to find proof, as it will help your chances of getting approved.

3. How To Increase Your Chances Of Approval

If you have time to plan, this helps assure you prepare and come to the table with the areas banks review. Here are a few things to consider:

• Try to show steady or increasing income/profit in your business. It’s normal to have fluctuating weekly or monthly income from your business, but showing a few years of steady, or better yet, increasing income will make a world of difference. If you’re a new business or if you’ve been showing consistent losses, I wouldn’t bother applying until you can improve your business’s financial landscape.
• Be established with at least two years under your belt. For a lender to approve a mortgage for a business that’s only been in operation for a year, would require some serious income and/or assets that could be sold to offset the risk. Even then, it’s still pretty rare.
• Have a good credit score (700+) will help you immensely. Lenders want to see that you have a history of making timely payments on your debt. Red flags like a bankruptcy or foreclosure on your report will most likely disqualify you. Other factors like late payments and collection accounts also affect your credit score. It’s worth taking the time to clean up your report BEFORE applying for a mortgage.
• Be ready to make a good-sized down payment. The bigger the down payment, the more easily you’ll get approved. I would try saving up enough to put down at least 20%-30% down. Those funds should be aged for at least 6 months to avoid any additional review related to gifts and income.
• Buy a primary residence. Applying for a home that you’ll actually live in will give you a better chance of approval. Getting a mortgage for a second property or investment property comes with a higher risk. Throw in that you’re self-employed, and you’ve got a big hurdle to overcome.
• Have cash set aside. Not only will you need a down payment but plan on paying for quite a few fees like inspections, prepaid for property taxes and homeowners’ insurance, state recording fees, title fees, appraisal fee, HOA Costs. I also suggest having cash set aside to keep yourself and your business going during slow times (AKA emergency fund).

If you aren’t approved for a conventional mortgage, all is not lost. There are a couple of other options you can try, but please know they are usually at a higher interest rate, so will make your monthly payment higher.

Here are a few of those options:

• Stated income/stated asset mortgage. This is based on whatever you, as the borrower, tell the bank your income is. Yes, this is real, and the bank doesn’t verify this amount. You don’t have to prove your income, but be ready to show a list of your income-generating assets (like property or other investments) as well as a list of your clients.
• No-documentation loan. This is used if your business is new, shows little to no profit, or had losses. These are high risk for the lender, so you’re going to pay a higher interest rate.
• Interest Only Loan. This is when you only pay interest the first several years of the loan — making your monthly payments lower when you first start making mortgage payments. This may sound like a great option to help save on your mortgage payments, but once the interest-only period ends, you begin paying both the interest and principal. Interest Only Loans makes the principle higher, as it wasn’t paid at all in those first years.

A side note; you do have the option of making principal payments during your interest-only payment term, but once the interest-only period ends, both interest and principal payments are required. Keep in mind that the amount of time you have for repaying the principal is shorter than your overall loan term.

While these are alternatives, if you don’t qualify for a conventional mortgage, I would really advise against having to use those options.

Your best bet is to work on paying down your debts, improve your credit, saving up cash while making your business more profitable. This helps assure you get a conventional loan and not have to worry about a high interest inflating your payments.

As you can see, getting a mortgage when you’re self-employed is a lot like getting a mortgage as a salaried employee, only your documentation is going to be more extensive, and you are going to need a stronger financial situation. Being self-employed is a lot riskier than having a steady income from an employer in the lender’s eyes.

Did this help? Want more tips and tricks? Ready to take the leap and level up your business?

Come join our community of Money Making Mammas where you’ll transform your business and your life. We are a supportive community of purpose driven women, offering a safe space to grow and learn with resources and solutions for everything business and more!

If you’re a woman running her own business or thinking of starting one, Money Making Mammas is the place for you!

You can find us @MoneyMakingMammas.com and social channels.

 Have questions or need consulting expertise for starting a new business?

We can help!