If you’re a gig worker, an independent contractor, or run your own business, it could be more difficult for you to secure financing when planning to buy a new home. That’s because it will be harder for you to prove your income without a steady paycheck. Even if you get a mortgage, you may face a documentation burden.Verify my mortgage eligibility (Feb 22nd, 2024)
Though most lenders have simple rules for self-employed borrowers, banks began to set flexible standards for housing in 2021. However, these individuals should expect to deal with additional application items to prove income stability since 2020 was distressing for businesses.
The Lender’s Perspective
For self-employed individuals, the loan approval process is similar to that of a W-2 salaried applicant. As you apply for the mortgage, the lenders will request and assess the following:
- Federal income tax returns of the past two years (business and personal)
- Recent business bank statements
- A year-to-date profit-and-loss statement showing revenues, net income, and expenses
- A duplicate of your business license
- A letter from a CPA validating that you’re running a business for a minimum of 2 years
Stable or Increasing Income
Though some fluctuation in your income is flexible, you should have two years of tax returns. Since lenders keep an eye out for the worst-case scenario, they will likely consider the lower two years when processing numbers. A significant decrease in income from year to year could be seen as a sign that your business is declining.
Ideally, self-employed individuals should have at least two years of income in the same industry. However, if you’re newly employed, lenders could make an exception, given that you have one year of self-employment tax returns in addition to W-2s from an employer in the same field.
Build Cash Reserves
Significant cash reserves and plenty of emergency funds demonstrate that even if the business declines, the borrower will be capable of paying off the monthly mortgage. It will also allow you to offer a large down payment. The higher the equity in the home, the less likely a borrower will walk away from it during a financial strain. The borrower is seen at lesser risk if they put too much cash into the purchase upfront.
If you’re self-employed and looking for a reliable lending company, CMS Mortgage Solutions has got you covered. In addition to providing effective mortgage solutions, they specialize in refinancing, home loans for first-time buyers, and more.Show me today's rates (Feb 22nd, 2024)