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How Those Who are Self Employed Get a Mortgage

June 8, 2016



Traditionally, the self-employed have had a somewhat more difficult path to obtaining a mortgage than those with full-time work. But just because you’re self-employed doesn’t mean the doors to homeownership are closed to you.

What to expect
Since self-employment is considered “riskier” than other forms of employment, some loan products may not be available – or, if they are, at slightly higher rates than for prime borrowers. Keep in mind that as a self-employed person, the kind of expenses and deductions you take on your income taxes may also come into play. Often, the self-employed will claim lots of business expenses so as to reduce taxable income on tax returns. This may be all well and good as a move to strengthen your business, but when your loan officer looks at your tax returns to decide whether to approve you, it may lead them to believe that you will lack sufficient funds for a down payment or monthly payments.

“How we qualify self-employed doesn’t always agree with how the IRS says you can run your business legally,” Pava Leyrer, training and development manager, tells Bankrate. “So they are finding it harder to get a loan unless they want to show more income to the IRS. It’s a fine balance.”

One way to mitigate the impact of self employment is to work on getting your credit score as high as it can be by paying down debt and limiting inquiries. Also, saving up for a larger down payment can lead to a reduced interest rate.

What you’ll need
When preparing to get home financing, it is important to calculate your average monthly income. To do this, your lender will typically take your last two years of tax returns, add up the adjusted gross and divide by 24 months.

After that, lenders will consider your debt-to-income ratio. If you have been working to pay down debt before starting the mortgage process, this ratio should be relatively favorable, but keep in mind that they will also be projecting the impact of your possible loan. According to Forbes, you may be denied financing if your home loan payments end up exceeding 28 percent of your income.

In general, the more documentation you can provide, the better. If you can show cash reserves, profit and loss statements, and balance sheets, you may be able to make yourself a more appealing mortgage candidate.

New rules
One recent regulatory change that affects self-employed is the Fannie Mae updated self-employment income calculation guidelines for borrowers involved in partnerships and S corporations. As of February 2016, lenders are encouraged to take a more stringent look at the “ordinary business income” and “distributions” of the self-employed, according to Zillow.


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