Mortgages for the self-employed can be difficult to obtain. The banks want concrete evidence of your income, such as they would receive from an employer. Because this type of documentation is not available, a self-employed borrower goes through a much more intense evaluation process to determine whether or not he is worthy of a mortgage. This does not mean that it is impossible for a self-employed borrower to obtain a mortgage though. It does mean that you will need to be very thorough and organized in order to get the mortgage that you want.
Tax Returns can be a Problem
Almost every mortgage applicant must supply their tax returns from the previous two years. For a self-employed borrower this means not only your personal tax returns, but those that you file for your business as well. The lender will need to see all supporting documents that go along with your 1040’s, including all schedules. This allows them to see not only the income that you bring in, but the deductions that you take on your taxes. If you know that you are going to be applying for a mortgage next year, it is worth it to watch your deductions, as they cut right from your bottom line income that mortgage lenders use to calculate your debt ratio. If you take advantage of as many deductions as possible in order to cut down your tax liability, you could hurt yourself when it comes to applying for a mortgage.
Self-Employed Borrowers Need Records
Your tax returns are not going to be enough for most lenders. They also want to see month-to-month profit and loss statements. Rather than waiting until you are ready to apply for a mortgage to begin creating these statements, you should create one every month. This allows you to keep track of your income as well as be organized enough to provide the required documents to your mortgage lender. Oftentimes, they want more than just the records from the last month or two. They could go back as much as a few years, depending on your income situation. The lender needs to be able to prove regularity to your income in order to use it for qualifying purposes.
Asset Statements are also Important
Your bank statements should not be thrown away once you look them over, especially for your business accounts. The lender will need to evaluate them for regular deposits as well as to source the deposits. If the money put in your bank account cannot be tied into your income, then you will have more paperwork and explaining to do. It is best to have at least two years’ worth of bank statements to provide your lender with when applying for a mortgage.
Know your Cycles
Every business has its ups and downs, which is what makes approving self-employed borrowers for a mortgage so difficult. If you have a few months out of the year that your income is drastically different from the rest, it is hard to determine your actual income. Most lenders will take an average of your income – typically two years’ worth, to come up with your income. This is important to keep in mind as the income used to qualify you for the loan could be quite a bit lower than what you anticipated. If your business does have such cycles, it is best to apply for the mortgage during your busy time and to take into account the lower amount of income that you bring in during your slow time.
Mortgages for self-employed borrowers are not impossible, but they do require extensive recordkeeping. It is not enough to throw a statement together when you know that you are going to apply for a mortgage. The lender wants to see consistency and accuracy in your records and could request that you go back a few years in order to confirm that consistency. If you know that you are going to apply for a mortgage anytime in the future, the time to start recordkeeping is now.
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