Since the mortgage crisis hit, it is increasingly difficult for anyone to get a mortgage. If you are self-employed, this process can be even more complicated, regardless of credit score and good income. Getting a mortgage when you are self-employed requires a little more attention to detail than your typical employee, to take your good income and transform it into verifiable income.
Paying yourself a salary is the most effective way to prove your income to a lender. By documenting your business income and expenses and paying yourself a reasonable salary, you can provide a W-2 to prove your income like everyone else. Providing your lender with a W-2 as proof of income can significantly reduce the number of follow-up questions and the amount of additional documentation you will need to provide to be approved.
Be prepared for it to take longer to process your loan. When it comes to verifying self-employment income, quite often each document submitted will be followed with more questions. On average, it can take 2-4 weeks longer to get a mortgage approved when there is self-employment income for the borrower. Make sure that you have room in your timeline to accommodate the added processing time.
Before anyone applies for a mortgage they should have all of the required documentation in order, however someone with self-employed income should have exceptional financial records. You will need to provide a detailed financial history that includes all of the business and personal tax returns and schedules for 2-3 years prior. If you are looking to buy after January 1 but before April 15, and your returns have not yet been filed for the year, you will need to have a profit and loss statement prepared for submission. This can make things even more time consuming during the busiest time of year for accountants, so be ready before you apply.
As complicated as mortgage approval can be these days, it is not impossible, even if you are self-employed. By being prepared before you apply for the loan, you can successfully navigate the mortgage process and be closing on your dream home before you know it.
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About David Goldstein — David Goldstein is an Owner and Founding Partner of Colibri Real Estate, LLC. which operates online education providers Colibri Real Estate, Insurance License Express and License Tutor. Follow him on Twitter.