Why The Self-Employed Have a Harder Time Getting Home Loans

When you’re self employed, you get to enjoy all sorts of freedoms, such as being your own boss and setting your own hours. But one of the things you’ll learn quickly is that other things, such as getting a loan for a home, can be unnecessarily difficult.

Most people who aren’t self employed have a fairly straightforward process. They’ve got their W-2 and income records that show stability and a consistent income. The self employed don’t always have that luxury. You may need to provide 1099s from anyone that paid you over the last two years, In addition, you have to provide accounting records so that lenders can verify how much you made after expenses were taken out.

• Of course, that isn’t to say it’s impossible to get a mortgage. You’ll just need to be better prepared and organized. Here’s what you’ll want to have before you approach your bank or lending institution: 
•  A copy of your free credit report 
• A letter from your tax preparer showing your gross and net annual income from the last three years Copies of your 1040s and 1120s 

Look for Ways to Reduce Risk to Your Lender 

You want to check your credit history carefully to ensure you’re doing everything to keep your FICO score as high as it can be. This especially means taking care of outstanding credit card balances since credit utilization accounts for 30% of your credit rating.

You want to do everything you can to reduce your risk to the lender and get them to approve your loan. This means things like having a high income or a lower debt-to-income ratio, a high credit score, a large down payment, a consistent credit history and an established self-employed history.

What Kinds of Mortgage Programs Work Best for the Self-Employed? 

There are several questions you’ll need to ask yourself in order to proceed with a self-employed mortgage loan. For example, how long do you plan on living in the home? If the answer is less than 10 years, a 10 ARM / 30 Year Amortization Loan makes solid sense. 

Another option for the self-employed is a full documentation loan with 25% cash downpayment. The second part is essentially the “gold standard” since you, the borrower, will put 25% cash down and the loan will be 75% of the loan to purchase price, not 75% of the value.

With the 10 year ARM, you’d need around 5% cash down (at least) and the understanding that the underwriting will be strict.

What Other Options Exist for Self Employed Mortgages? 

A stated income home loan used to be a much more common option before the housing market crashed. They are rare now and hard to get -- needing high down payments and excellent credit. Another type of loan is a “no doc mortgage loan”. These loans also used to be common but are illegal now because they violate laws that stipulate that lenders need to verify and document the borrower’s ability to make mortgage payments.

A hard money loan may be a possibility. Although these types of loans are generally for investment properties, a lender will lend up to 70% of the value of the property after it is repaired. There are higher interest rates and these types of loans come with an interest-only repayment term.

Keep in mind that tax returns are always verified by mortgage lenders. They will ask the IRS for a tax return transcript before a loan is funded.

The bottom line is that even if you’re self employed, you don’t need a special type of mortgage. Self employed borrowers, as long as you meet the stipulated requirements, can get FHA, VA, USDA and 203k loans as well as conventional and jumbo loans.

If you’re a business owner and would like to see if you qualify for a home loan for self-employed, get in touch with us today. Make sure to have at least your last three years of tax returns for your personal and business needs, as well as profit and loss statements, bank statements and anything else you feel will help speed up the approval process. Talk with our mortgage specialists today to learn more. Call (855) 225-2345 do discover your best home loan options today!