The process of getting a home loan when self-employed does not have to be difficult if you are prepared. While the self-employed enjoy the freedom to work when and how they want, full-time employees benefit from getting the same paycheck month-to-month from long-established companies. In the eyes of lenders, that gives them a sense of security the self-employed may not have. This makes working with an experienced mortgage professional essential when getting a mortgage while you are self employed. Here are five key items to getting a loan as a self-employed business owner:
Document Your Income
When banks consider the self-employed for a mortgage, they usually look at the last two years of tax returns. They’ll take the income you earned, combine it, then divide by 24 months to estimate your monthly income.
Generally, you’ll have better odds of being approved on a loan if the monthly debts are less than 45 percent of your monthly income. Of course, you must consider other factors as well. Your loan officer may be able to find items to add back in to your income such as depreciation expenses.
Track your Credit Score and Keep Records
In addition to your income taxes, there are two ways you can prove you aren’t a risk to lenders: a high credit score and adequate record keeping.
A high credit score is crucial for those who work for themselves. Again, it goes back to a reliability factor. Generally a 600-640 FICO score is considered satisfactory for many mortgage lenders if you are self-employed. Government loans such as FHA mortgages may allow self employed borrowers to qualify with as low as a 580 credit score.
Depending on the kind of work you do, you may already have solid record-keeping skills that will make analyzing your income a lot easier. Invoices and accounting software records can help you stay more organized. Lenders need to know you have enough revenue, after expenses, to pay back the loan.
Review Write-Offs with Your Accountant
Tax write-offs are a Godsend for people who work for themselves — until they need a loan. Writing off expenses on your taxes does ease your tax burden, but it also reduces the amount of revenue on your taxes when lenders consider you for a mortgage. Your accountant may offer solutions for write-offs that do not affect your qualifying income such as depreciating assets.
If you are thinking of buying a new vehicle, taking a trip to a seminar, or paying some other huge expense for your business, you may want to wait until after you get approved on the mortgage.
Separate Business and Personal Expenses
Every lender is going to ask for two different but important plans: First, your business plan: What do you sell? How is your business growing? What kind of clients (if it doesn’t breach any confidentiality) do you have? It all comes back to knowing where the money comes from and whether the lender considers the source of your income reliable.
Secondly, every business experiences setbacks, and the self-employed are no exception. Do you have a savings plan, a line of credit for emergencies that will allow you to continue making payments until your financial situation gets better? Additional assets that you can document area always a positive thing when qualify for a mortgage.
Keep up Appearances
Full-time employees give the appearance of being a safer investment. The self-employed can also make themselves more appealing through changes in their appearance. Registering your business and having separate business accounts from your personal accounts can make record keeping easier and give the appearance of legitimacy in your work.
Separating the business from the personal also can help keep more money in your wallet. If you use a business credit card for a work expense, your company can write it off, and your personal income will still not be hurt by the deduction.
So, if you work for yourself, have enough clients, and work to keep your bank account in the black, I do have one good piece of news for you: You’ve already mastered overcoming obstacles and objections as a business owner, so the challenges of getting a mortgage should be nothing new to you.
Apply for a Self Employed Home Loan
To apply for a self employed home loan, call Riverbank Finance today at 1-800-555-2098.