Overcoming Mortgage Hurdles for the Self-Employed

You might be one of the 9 million people who have decided to become self-employed.  Being self-employed probably introduced taxes and health care coverage challenges.  You have finally settled into your new lifestyle and decided to apply for a mortgage.   Perhaps you cannot provide W2 or traditional predictions of incomes.  There are still a few ways to prepare for a smoother process when you apply for a mortgage.

Self-employed borrowers have a higher hurdle to overcome after stricter mortgage requirements went into effect in 2014.  These borrowers must now provide two years’ worth of tax returns.  The most common complaint from borrowers is that these returns are an unreliable record of their take-home pay.   There are many tax advantages of taking as many deductions as possible, but that does not necessary translate into an advantage when applying for a mortgage.

How can a self-employed borrower overcome this extra challenge?  Organize and prepare BEFORE you apply for a mortgage.  Buying a home is a big decision and it helps to have your taxes aligned with your home buying goals.  Looking ahead means self-employed borrowers should plan on taking fewer deductions the two years before buying a home to boost their overall income.  Yes, it might translate into increased taxes for a short time, but being able to qualify for a mortgage and a better interest rate will be worth the extra time strategizing with your accountant. Moreover, make sure you are showing an increase from year to year.  Lenders might ignore seasonal increases and decreases (landscapers for example) but they do not want to see a constant decline.  Borrowers should focus on their business appearing consistent and not volatile.

For those of you on a time constraint, you might have to consider alternative options. Do you have a spouse or family member whose income is documented by W2s willing to co-sign on the mortgage? You might not be able to qualify for a larger home based on only one income, but applying for a conventional loan would be easier. 

If you are saver, you also have an option of an unconventional loan.  For example, unconventional loans allow qualified borrowers to apply using the deposits recorded in their bank statements.  Just because a loan is unconventional does not mean you are necessarily paying more in interest.  There are numerous options for the self-employed borrower.   A mortgage broker can look at your personal situation and suggest the best option for a loan.  Look for the most up to date rates on www.lordmortgage.com