Self-employed people will need to provide a few more items to get a loan than those with a steady paycheck.
Here’s a list of some of the usual things a lender wants to see:
- Last 2 years of W2's and tax returns (tax returns for the self-employed)
- Copy of driver’s license
- Bank and financial statements showing the borrower’s funds and reserves
- Proof of the source of the down payment
- Verification of employment
- Information about the borrower’s debts
If the borrower is self-employed, the lender will likely ask for the following:
- Profit and loss statement for your business showing income and a breakdown of expenses
- A Breakdown of earnings year-to-date
- Complete 2 year work history
- Letter of explanation detailing varying income
An additional difficulty that I’ve been hearing about for self-employed borrowers comes from how they treat business expenses when preparing their federal income tax return. For a mortgage loan, the lender will look at the income reported on your return. What’s good and legal for reporting to the IRS may mean you won’t qualify to borrow as much as you expected.
Some options to help the self-employed, or any borrower, to qualify are the following:
- Maintain a good credit score. A mortgage professional can give you suggestions on how to make your score better. Also be aware that the score a lender pulls for a mortgage may come out differently than other sources.
- Keep debt-to-income ratios low. Consider paying off some debt to reduce the ratio. A mortgage professional can advise which debt is best to pay down and by how much. Remember the lender will be looking at trends as well.
- A strong record of saving and investment.
The biggest mistake I see is buyers that don't talk to a mortgage professional. Either they assume they can't afford to buy a home (just ain't necessarily so) or they don't really know how much they can afford. Talk to a mortgage professional. Unlike applying for credit cards or even a car loan, your credit is not adversely affected by shopping for a mortgage.