Self-employed? Here’s What You Need to Know About Applying for a Mortgage
The number of self-employed individuals across the country continues to grow, with an estimated 16 million people opting to be their own boss.
While the gig economy is booming and self-employment has become increasingly commonplace, the hurdles faced with obtaining a home mortgage remain. Ask any lender and you’ll learn the stark truth: it’s easier to qualify when you can show a W-2.
That doesn’t mean you can’t get a mortgage and buy a home. Self-employed individuals do it all the time. But you will save yourself a lot of headache if you plan ahead, understand common mistakes to avoid and have a game plan for putting your best financial foot forward.
It’s useful to speak to a trusted lender long before you plan to actually apply for a mortgage. They can look at your specific situation and give you advice on what you should do to improve your financial standing when it comes to applying for a mortgage.
With that in mind, here are three of the most common missteps you will want to avoid:
Unstable income. Since you are self-employed, you may be asked to submit at least two years of federal tax returns. The lender will want to see that your business income is stable enough to pay a mortgage every month.
A few minor ups and downs are to be expected. But overall, you should be able to show a lender that you have a steady and consistent income stream. Erratic increases and decreases in revenue can serve as a red flag to a would-be lender.
Mingling your personal and business accounts. Are you in the habit of using your business debit card to pay for your family’s groceries? Have you been using your personal credit card to make large purchases for your business, then carrying the balance? When it comes to self-employment and owning your own business, it’s important to keep your personal and business accounts as separate as possible.
Personal and household expenses should be paid from your household account, not your business one. Deposits should also be made appropriately. Pay yourself from your business revenue, transferring pay from your business to your household account. You may want to consult with your accountant as to a suitable amount. Be sure you pay yourself on a regular basis, at least quarterly, but preferably monthly or bi-weekly.
Carrying business expenses on your personal credit card will impact your debt-to-income ratio as well as your credit score. Make it a good financial habit to pay business expenses with your business checking account and business credit cards. You should be doing so anyway, but if you have been sloppy or are new to self-employment, now is the time to break those bad habits. Not only is this important in applying for a mortgage, but it is necessary for accurate tax preparation.
Disorganized business paperwork. Yes, you can expect to provide a lot of information when applying online for your mortgage. But, if you’re self-employed, the lender is likely to require additional paperwork related to your business, such as tax returns, profit-and-loss statements, bank statements and other financial documents.
If you have been disorganized with your record keeping, not only will you have problems when filing your quarterly taxes, you may have a problem proving to a prospective lender that you are credible in how you are presenting your financial standing.
If you are new to self-employment, do yourself a favor and have your business and personal financial documentation organized and available, before you sit down with a lender. The payoff will be a mortgage process that is streamlined and as stress-free as possible.