Self-Employed Homebuyers Guide to Getting a Mortgage
Note: The following information pertains to home mortgage loan products. Farm and business loans will use different loan approval guidelines.
One of the most important factors in getting qualified for a home mortgage loan is income. Lenders, both large and small, justifiably want to know that you have money rolling in on a consistent basis—as this is a good sign that that you’ll be able to repay the money you borrowed. Employees that are paid hourly or salary wages are able to prove their income basis by providing IRS Form W-2 Wage and Tax Statement from their employer indicating just how much money they earn. However, things get a little bit trickier when we start talking about mortgages for self-employed individuals.
Unlike employees that are paid hourly or salary wages, self-employed homebuyers can’t simply produce a W-2 to prove their income. Instead, self-employed applicants will be expected to produce evidence of at least the last two consecutive years in tax returns. Coming up with this information, in addition to other supporting documentation, can be some work. Lenders will calculate your taxable income basis differently depending how you report. Self-employed borrowers may use Schedule C, Schedule F or Schedule E to report self-employed income.
The most common issue self-employed individuals encounter when applying for a home mortgage loan is differentiating between how much gross income they make and the amount the government recognizes as net income, according to their tax returns.
Despite having plenty of cash flow on hand, not to mention access to credit through their business accounts, self-employed individuals are often shocked when they learn just how much their net income actually is after factoring in tax write offs and other business expenses. Conventional mortgage investors Fannie Mae and Freddie Mac base their lending decision on net taxable income.
So now that you know the challenges for self-employed folks, let’s talk about the best way to approach qualifying for a home mortgage loan. Here’s how to start: Gather all your documents. Getting your tax returns in order is of utmost importance.
GATHER AT LEAST THE LAST TWO YEARS OF TAX RETURNS.
Most residential home loan options require at least the last two consecutive years of your tax returns.
GATHER ANY OTHER APPLICABLE DOCUMENTS.
In addition, you’ll want to gather any other tax documents that may be applicable to your specific scenario. These may include:
- Schedule C
- Schedule E
- Schedule F
- Form 1120S
- Profit and Loss Statement
Getting past tax returns and other supporting documents should be simple. Most self-employed individuals can turn to their accountants for this information.