If you’re reading this article, you’re probably self-employed and you need mortgage financing to buy a home in NH. You might be right to think it would be easier to qualify for a mortgage if you worked for someone else and had W2 income. A self-employed borrower might require more documentation than a W2 worker, but generally not much more. Usually, it’s nothing more than the documentation you already have just because you need it to run your business!
As a self-employed person, you already work hard and you know how to get things done! I help self-employed people get mortgage financing every day and I can help you, too. Here are the steps.
1) PROOF OF INCOME. Just like any W-2 borrower, lenders need to determine how much you make and how much of a home and mortgage you qualify for. For a self-employed borrower, that process starts by looking at your 2 most recent tax returns. Help us to help you – show us all pages to your personal and business returns.There are tax deductions on your tax returns that we can add back to your taxable income to help you qualify. As long as your annual income is not decreasing, we’ll average your income over that 2 year period of time.
Depending on the time of year, we may need to see a year-to-date profit and loss statement. The later into the year we are, the more likely we will need to see a profit and loss statement. This also may be requested if the income in the prior two years was inconsistent or if a newer business to confirm your continued profitability. NOTE: There must be two years income from self employment in the same industry/field to use this income to qualify.
Aside from the income documentation, obtaining a home loan for a self-employed borrower is the same for all other borrowers as described in the next three steps.
2) DEBT TO INCOME RATIO. After we determine how much income you have to qualify, we need to know what you have for personal debt: auto loans, Student loans, credit card debts, RV loans, etc…Child support and alimony that you pay are also considered monthly debts that will reduce your income. Your income will be reduced by your monthly debt to show us what you have available for monthly income to purchase a home. NOTE: If you have a business vehicle with a loan that is paid out of your business checking account each month, or other debts that are paid by the business, we may not have to include those debts in your personal debt ratios. They can be excluded if you can document the business paying for this debt for at least 12 months.
3) CREDIT. More than any other criteria, your credit score will determine what your interest rate will be. The higher your credit score, the lower the interest rate will be. If you are concerned about your credit history, start by getting your free credit reports from AnnualCreditReport.com. As a rule, you’ll want to have at least 2 FICO scores of 620 or higher. The one thing you can do in the short term to increase your credit score is to keep the balances on your credit cards low. A best practice is to keep balances on your credit cards at 20% or less of the available amount. Don’t close any of your credit card accounts or your credit scores will go down. The longer your credit history, the better! Also, be sure to make payments on time. If you make payments late on credit accounts, this will bring your score down. Collections will also reduce your credit score.
4) CASH FOR DOWN PAYMENT. More than any other criteria, the amount of cash you have to contribute to the down-payment and closing costs will determine what mortgage program you can participate in. If you’re a Veteran of the Armed Services, you’ll want to consider a $0 down VA loan. If you are buying in a rural area, the $0 down USDA RD program is worth a look. The 3.5% down FHA is also very friendly for self-employed borrowers. If you have 5% or more down, you will want to consider a conventional loan. All of these programs have provisions that allow the Seller to pay some of the closing costs.
Mortgage Fact: Lenders charge the same rates for self-employed borrowers as W-2 borrowers.
DON’T LET YOUR DEDUCTIONS PREVENT YOU FROM QUALIFYING FOR A HOME LOAN!
If you made a million dollars per year on your tax return but had a million dollars in expenses, then you didn’t make anything. Right?!?! Lenders look at net taxable income to determine how much you qualify for. Best Practice – take all your legitimate deductions. Taking questionable deductions will affect your qualifications for a mortgage and the less income you show, the less of a mortgage you qualify for!
I will help you narrow down the options to which programs fits you best. We’ve been helping self-employed home buyers qualify for mortgages for more than 20 years. Call me at 603-471-9300 or send an email.
Watch this three-minute video with Charley’s top tips for qualifying for a mortgage when you’re self-employed.
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