Whether you’re a freelance web designer who spends their days working from a coffee shop or a small-business entrepreneur with a team of staff, if you’re a self-employed individual and you’re thinking about buying a new house you may face some difficulty getting approved for a mortgage.
In today’s blog post we’ll share how you can provide paperwork and other evidence to show your mortgage lender that you’re a quality applicant who has the ability to make their payments.
As a general rule of thumb, if you’re in business you should invest in the services of an accountant to handle your tax preparation and other financial matters so that you don’t miss anything important.
If you have an accountant, let them know that you’re applying for a mortgage and ask them to create a package that includes your business financials as well as your past two years of income tax documents.
When reviewing a self-employed mortgage application, lenders generally look closely at how income is calculated and presented. Because self-employed earnings can vary from month to month or year to year, it is important to provide clear, organized documentation that helps explain your income picture.
Taking time to understand how your income may be evaluated can help you prepare for questions during the application process and make it easier for a lender to assess your ability to repay the loan.
Your debt-to-income ratio is one of the primary factors calculated during the mortgage application process and if you don’t have a regular paycheck or salary this is how your lender will assess your ability to pay.
In short, this number is the percentage of your monthly gross income that is used to pay debts, taxes, insurance, and other items. Add up your car payment, loan payments, credit card payments, child support and any other regular debts and divide this number from your monthly income. If this number is too high, your application may be declined.
In addition to income and debt levels, lenders may also want to see that you have funds available for your down payment and other upfront costs. For self-employed borrowers, having these funds clearly documented can help show that you are financially prepared for the home purchase.
Cash reserves can also provide added reassurance that you have a financial cushion available after closing. Organizing these assets ahead of time can make the application process smoother and help avoid delays.
Pro Tip: Consider all loan options, including fixed-rate mortgages, adjustable-rate mortgages (ARMs), and jumbo loans, before applying for a home loan that best suits your needs.
Your credit rating – and that of your business – will be intensely scrutinized by any potential lender in order to determine whether or not you present a significant risk of missing a payment or defaulting entirely.
Maintaining a positive credit history can be challenging as an entrepreneur, especially if you’re in the early stages of your business and you’re relying on loans or other financing to help fund your operations. Try to make sure that every bill is paid and avoid situations that can leave a blemish on your credit report.
Lenders may also consider how long you have been self-employed and whether your business history appears stable. A longer track record can make it easier to show consistent operations and demonstrate that your income is tied to an established business activity.
If your self-employment is relatively new, it may be especially helpful to present a clear picture of your business background and financial records. In general, stability and consistency can strengthen your overall mortgage application.
Even if you have your past taxes and clean credit history you may still face a bit of an uphill battle in getting that mortgage approved. It’s best to seek a mortgage professional’s advice as early on in the process as you can, as they work with self-employed individuals regularly and will be able to help you craft your application.
Sammamish Mortgage is a local, family-owned company based in Bellevue, Washington. We have been in the industry since 1992 and have been offering a variety of mortgage programs to borrowers in all of Washington, Oregon, Idaho, California, and Colorado. Visit our website to get an instant rate quote or to use our online mortgage calculator. Please contact us if you have mortgage-related questions or to get pre-approved for a mortgage.
It can be more difficult because lenders usually require more documentation to verify income, business stability, and ability to repay the loan.
Lenders commonly ask for the past two years of personal tax returns, business tax documents, and financial records that show consistent income.
An accountant can help organize tax returns and business financials so the lender receives clear and complete income documentation.
Debt-to-income ratio is the percentage of gross monthly income that goes toward debts and required housing-related payments.
Lenders use it to evaluate whether monthly income is strong enough to cover existing obligations and a new mortgage payment.
Yes. Lenders review personal credit closely, and they may also evaluate business credit to assess repayment risk.
Keeping accurate financial records, paying bills on time, maintaining strong credit, and managing debt carefully can improve approval chances.
Yes. Early guidance can help identify documentation needs, address qualification issues, and choose a loan program that fits the borrower’s situation.
Options may include fixed-rate mortgages, adjustable-rate mortgages, and jumbo loans, depending on the borrower’s financial profile and loan amount.
Yes. Sammamish Mortgage serves borrowers in Washington, Oregon, Idaho, California, and Colorado.
Our loan officers are ready and waiting to help you apply for your home loan.
Whether you’re buying a home or ready to refinance, our professionals can help.
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