- May 9, 2017
- Posted by: steve
- Categories: compare mortgage types, mortgage articles, self employed mortgage loan
Did you know that you can still get a mortgage when you work for yourself? Read here to learn how to get a mortgage when self employed.
According to the U.S. Bureau of Labor Statistics, there were approximately 15 million self-employed (or 10.1 percent) people in the workforce as of 2015.
Chances are, this figure has risen.
Which brings us to mortgages.
How do you get a mortgage when self employed?
Read on to find out what you need to know.
It’s not as impossible as you may think.
Why it’s hard to get a mortgage when self employed
It’s hard for a number of reasons, but a common one is our history. Especially the housing market collapse in 2008.
Before this time, a self employed person could apply for a self-certification.
This certification indicated to the mortgage lender what your income was. And the lender would go forward with the mortgage process without verifying the information.
This lead to many people abusing the system. Because people would state a fictitious income they never did have.
So, when the interest rates rose in 2005 and 2006, many people defaulted on their loans.
And, there you have it, the housing collapse!
(Note: Please know that self employed individuals did not cause the collapse. The main cause was a lack of regulation and over-aggressiveness in the banking industry.)
Now, although Stated Income/Stated Asset Mortgage (SISA) loans are coming back, lenders are more hesitant toward self employed individuals—be it fair or not.
Is there a self employment mortgage?
While there are several types of mortgage loans, a self employment mortgage is not one of them. That doesn’t mean there aren’t loans that appeal to self employed individuals.
It just that there isn’t a specific mortgage loan with that name. (But who knows? There may be in the future.)
What it comes down to
To get a mortgage when self employed, you need to prove to the lender that you can afford the mortgage. This means you need to be able to prove you make what you say you make.
To do this, you’re going to need these things (we’ll explain them more in detail):
- Current business license
- Typically 2 years of tax returns
- Proof that you have kept and will keep up regular work—again it’s proving to your lender that they can trust you to pay off the mortgage.
- Sizeable downpayment
- Strong credit score and credit history
Current business license
This is to show the lender that your business is legitimate and up to date.
2 years of tax returns
Most likely, the lender will ask you to submit an Internal Revenue Service (IRS) Form 4506.
Form 4506 is filled out so the lender can receive a copy of your tax returns directly from the IRS.
Overall, the point of having at least 2 years of tax returns verifies to the lender the income and profit you’re stating is steady.
Which means you won’t be at risk to default on your loan should you be approved.
A lot of times, the mortgage lender will want an accountant to put together your profit and loss statements, tax documentations, etc.
This assures the lender that you could not have tampered with it. (Note: The lender doesn’t assume you’ll tamper with your documentation. They need to do this to cover their back.)
Sizeable down payment
Unlike individuals who are employees of companies, you’ll need a healthier than normal downpayment to get a mortgage when self employed.
This means you’ll owe less money. Which entails less of a financial risk.
Strong credit score and credit history
Self employed or not, a good credit score and credit history is beneficial. Because it communicates to the lender that you’re financially responsible.
You pay back your debts and loans. Which means there’s a high likelihood that you’ll pay off your mortgage.
Unfortunately, a W-2 employee still has a high chance of getting a mortgage if his or her credit isn’t the best.
However, this isn’t the case with the self employed.
What you need depends on the type of business you have
While we’ve listed what you generally need to get a mortgage when self employed. Here’s specifically what you need based on your business entity.
If you have a sole proprietorship, you are the sole owner of your business. That, and you and your business are one and the same.
In terms of mortgage lending, you’ll need to hand over Form SA302 and at least 2 years of accounts.
In a nutshell, Form SA302 is a document that states the amount of income you’ve declared for that year.
Instead of having one owner (as with a sole proprietor), you have two. Though the business and business owners are still one and the same.
You’ll most likely need to submit the same things as a sole proprietor. Plus, evidence showing what percentage of the profit is yours.
Limited Liability Company (LLC)
Unlike a sole proprietorship and partnership, the business owner(s) and business are separate.
You’ll need to show the lender proof of your standard salary. And the dividend payments.
(Be sure to indicate any retained profits to the lender. Otherwise, the lender may believe you have lower profit than you actually do.)
A corporation should follow the same principals as the LLC. Although, there may be slight discrepancies.
How do I improve my chances of getting approved?
You’re not powerless to get a mortgage when self employed. Here’s what you can do to increase your chances of getting approved.
Have a good credit score
Remember how we said a high credit score will show the lender you’re financially responsible? Well, doing this will significantly improve your chances of getting approved.
So, aim for a FIC score of 700 or higher.
Also, know that the lender may do a credit report on your business as well. So, make sure your business doesn’t have any outstanding debts.
Significant down payment
‘We’re talking more than your standard, which is normally 20% of the house.
Large savings account and emergency fund
Show the lender you’ve been saving for this property. To convince him or her, show the large amount in your savings.
Being that you’re self employed, you should already have a sizeable emergency fund. Show that too.
Show the lender you have an established business
People have this notion that self employed people are barely making it. Your lender may have fallen for this stereotype.
Prove that you aren’t by showing documentation that you own an established business.
Doing this will make the process smoother to get a mortgage when self employed.
For more information about how to get a mortgage when self employed, contact us.