Home loans for self-employed professionals can be challenging. This article will outline basic tips that increase your chances of mortgage approval.
Being self-employed is one of the most rewarding and uplifting lifestyles possible. Whether you are an individual freelance editor (a “solopreneur,” as they are sometimes called), a floral shop owner, a remodeling contractor, or the founder of a heavy construction firm, the self-employed lifestyle gives more independence, the ability to follow your passion, and the chance to build a company that could, with hard work and just little luck, be sold for a massive payout.
The life of a self-employed professional is not easy, and it’s certainly not for everyone, but it’s clear why so many people love this path. But it does create some challenges. From the perspective of a mortgage lender, one of the challenges, although minor, is securing home loans for self-employed individuals.
What’s the Same?
In many ways (in fact, in most ways), getting a mortgage for a self-employed professional is the same as any other home. Regardless of your occupational status, the lender needs to know that you can repay the loan, which is done through information that includes your credit score, debt-to-income ratio, and overall income.
Verifying your credit score and debt load uses the same process, in most cases, as any other mortgage application. The lender will also need to verify your overall income. However, the process, as well as the documents, for confirming this income are different when applying for home loans for the self-employed.
How are Home Loans for Self-Employed Professionals Different?
In all reality, there is only one aspect of the mortgage application that is substantially different: income verification. Self-employed business owners do not have the same income documents. They don’t (usually) have pay stubs, employee tax returns, W2s, and other documents that are typically used in a mortgage application.
Basically, when you work for someone else, you or the lender can go to your employer and request financial information. When you are self-employed, you have to collect that financial information yourself. Also, there may be more documentation required, specifically information on the nature and strength of your business.
7 Tips for Getting a Mortgage When You are Self-Employed
1. Remember the Basic, Universal Steps for Securing a Loan
Honestly, there are more similarities between home loans for self-employed borrowers and “typical” loans (for lack of a better term) than there are differences. You still need a decent credit profile although you don’t need stellar credit, and you should have a manageable debt-to-income ratio, usually no more than 45% to 50%, depending on the loan. These are the same whether you work for yourself or an employer.
Don’t forget these universal factors. Don’t focus so heavily on the unique aspects of home loans for self-employed workers that you neglect the basic, foundational aspects of a mortgage, especially your credit score and DTI.
2. Create a Client’s List
One of the underlying themes that we will see throughout these tips is the need to provide as much information as possible. This means information on your personal finances, as well as information that demonstrates the long-term stability of your business.
One of the ways you can show that stability is through a list of clients. Having a client list, especially one that shows the amounts paid from each individual, company, or organization, will help the lender understand the overall scope of your business and give context to how your business makes its money.
3. Bring Information from Your Accountant
Your accountant, assuming you work with one (and, as a self-employed professional, you probably should) is one of the most important resources available. Not only can they reduce your tax liability and help you make important financial decisions, they can also provide information when you are applying for a mortgage.
Talk with your accountant before (or shortly after) meeting with a lender. Let them know you will be applying for a self-employed home loan and that you need documents on past earnings. They can likely provide important income and financial information that will be useful for your application.
4. Show Your Share of Earnings
Many self-employed professionals work within a partnership or S-CORP. If this is the case for you, it will help to bring documents that show your share of the company’s earnings. This is usually done through a Schedule K-1 form, a document that reports the amounts that are passed to a specific party.
5. Keep Business and Personal Expenses Separate
We certainly won’t tell you how to organize your business, but we can say that when business and personal finances, especially loans, are separate, it can make your application much easier and (potentially) increase your chances of approval.
Having a clear separation between the business and yourself is usually a good practice. For example, if there is an equipment loan for your business that is tied to your personal finances, it could drive up your debt-to-income ratio and reduce your chances of approval. However, if this debt is strictly under the business, it will create less complications.
6. Show Membership in a Professional Organization
Membership in a professional organization, such as a trade group, is not a guarantee of success. But it does show that you take things seriously, that you are a dedicated professional who wants to meet the highest possible standards.
If you are a member of any professional organizations, bring this information to the lender.
7. Evidence of Insurance
Lenders want to know that your income source (the business) will not falter. If there is any damage or major issues, they want to know that your business can handle the setback. Business insurance, including damage protection and liability insurance, could become an important issue. Bring evidence of this insurance so your lender knows that the company is protected.
Find Home Loans for Self-Employed Professionals Today
Securing home loans for self-employed professionals is easier than you might think, and there are numerous options available, including bank-statement loans and even government-backed mortgages like FHA loans.
Contact our team today to learn more about home loans for the self-employed in San Diego and the surrounding area.