Getting a mortgage when you’re self-employed isn’t always straightforward. In fact, it often requires a lot more effort and preparation than those who are salaried or employed by a traditional company.
That being said, it’s entirely possible!
So, if you’re self-employed and wondering how the heck you’re going to qualify for a mortgage, you’ve come to the right place. While it’s always best to meet with a mortgage broker, this article will provide you with a generalized idea as to what you can expect.
What Does “Self-Employed” Mean?
These days, a growing number of professionals are straying from that 9-5 life. From here, they’re opting to work for themselves or start their own business. In this sense, the definition of “self-employment” is always evolving. The following are all examples of professionals that would be considered self-employed when applying for a mortgage:
- You run a business alone or with a partner(s)
- You earn 100% commission
- You work on short-term contracts for employees
When it comes to documentation, let’s just say that more is always more. At the end of the day, you’ll want to provide as much documentation as possible. You’ll also want to have documented proof of every source of income that you have.
For self-employed professionals, your mortgage broker is going to request your past two or three years of self-employment documentation. This means that you’ll need your self-employment role established for at least two or three years before trying to qualify. In general, you’re going to want to have the following documents prepared ahead of time:
- Monthly bank statements
- Tax returns
- Credit report
- Business plan
- Business profits and loss statement
- Business credit card statements
- A letter from your accountant
- A letter from your current landlord
- A gift letter (if applicable)
Having these documents prepared (in both physical and digital form) ahead of time is going to make you look like a more organized recipient. Remember, your goal is to convince the lender that you’re a responsible borrower with a minimal risk. This is what’s going to qualify you for a promising loan with as low an interest rate as possible.
Pro tip: Is your business still relatively new? If so, your lender is going to want as much proof as possible that your business is viable and growing. In this event, it’s best to have documentation that showcases the growth and promising future of your business.
The Income Issue
One of the most common issues that self-employed professionals run into with qualifying for a mortgage is their income.
Number one, self-employed income is often more variable than traditional income. From the perspective of the lender, they can’t guarantee that your income will remain steady on a routine basis.
Number two, many self-employed professionals use business expenses to reduce their taxable income. So, when a mortgage broker reviews their official income documentation, this income doesn’t always reflect their actual earnings.
What Does This Mean?
So, what exactly does all of this mean?
To help illustrate this notion, let’s point to an example. Let’s say that your gross income for the year is $150,000. However, you also wrote off $15,000 in business expenses. This means that your net income is $135,000.
When it comes to qualifying for a mortgage, this is the number that your mortgage broker is going to be working with. In other words, you’re not going to qualify for a mortgage that represents what you consider to be your total income.
How to Help
To help make yourself a more attractive candidate, there are a few steps that you can take.
First, you can offer a larger down payment. Second, you can meet with the bank to figure out how you can improve your credit score and minimize your debt load. Third, you can have a parent or guardian co-sign the mortgage with you.
Doing one or all of the above will help to increase your appeal to lenders. At the end of the day, you’re going to get a better quality loan when your perceived risk is minimized.
Time to Schedule an Appointment with a Mortgage Broker
Sure, qualifying for a mortgage when you work for yourself is a little more difficult than the traditional route. But, will a little preparation and a lot of patience, it doesn’t have to be so bad. In fact, it’s probably going to go a lot better than the internet tells you it will.
So, go ahead and book that appointment with your mortgage broker already! When you meet with this broker, they’ll provide you with all of the specific documentation necessary to move forward in qualifying for a loan.
Let a Nobul verified Agent help you navigate these tricky waters!