Small business might be the backbone of America, but those that are self-employed and have the courage to go down this path, often also providing employment for others, can find it challenging to secure a mortgage.
While lenders may set a higher bar for the self-employed, it is worth persevering with an application. An experienced lender can navigate the process with you and help make securing a home loan when self-employed a little easier.
This snapshot of what a lender requires may be useful if you are now self-employed and thinking about buying and building your next home.
Personal Bank Statements
Like any other borrower, you’ll need to provide bank statements that cover at least the previous three months. This check of your income and outgoings will indicate whether you have the cash flow to afford a loan.
Lenders will go to your credit score to ascertain whether you have bad debts or a history of failing to make payments. Again, every loan applicant faces this check. Your credit score can determine whether you get a loan and also the rates at which a lender will make that loan.
Two Years of Federal Tax Returns
Because you’re self-employed, a lender will verify your earnings records with the IRS, essentially matching your income to the taxes that have been filed. The underwriter will want to have your income well documented so that they can weigh the risk of the loan and whether they’re willing to greenlight it.
Profit and Loss
You’ll need to present the lender with a profit and loss statement. It’s seen as additional evidence that your business has income and legitimate work related expenses. This statement requires a form called a 1040 Schedule C. Owners of incorporated companies have one of two other forms: an S-corp or C-corp.
If you require a license to operate your business, a lender will insist on it being presented. Typically, this is a check to ensure you’re a legitimate plumber, electrician, or another operator who requires a license to operate legally.
Proof of Funds
The lender is going to want to see that you have enough money to pay your down payment, closing costs, and any pre-paids (like taxes or insurance). They’ll also want to see enough of a cushion that you can continue to pay your mortgage payments for the first few months. (You’ll also need to have some money set aside for your inspection and appraisal fees – usually paid upfront).