Self-employment can be liberating for many Americans seeking to ditch the 9 to 5, make an income for themselves, and otherwise gain the freedom of becoming their own boss; however, getting a mortgage or taking out any loan can actually be a bit more challenging for the self-employed.
Nevertheless, you can get a mortgage when you’re self-employed, but it may take a little extra preparation and work on your part. Let’s dive into that.
1. Keep Great Records
If you’re in business for yourself, hopefully, you already maintain accurate and detailed records, receipts, and documents stating your income and expenses. If that’s you, then you’re golden when it comes to getting a mortgage. If not, then you’ll likely need to begin preparing some documents to present to your lender.
Regardless of if you’re a W-2 employee or self-employed, lenders will likely want to see at least a couple of years of income records. As an employee, naturally, that falls into the category of a W-2, for the self-employed a simple profit and loss statement will generally suffice for proving your income.
2. Watch The Deductions
Deductions are a huge windfall for many self-employed individuals and help relieve the burden of paying more income taxes come April. They can, unfortunately, be a bit of a detriment when it comes to getting a mortgage.
When it comes to getting a home loan, lenders view income as total income after deductions. Just as W-2 employees can’t leverage their gross income, self-employed individuals can’t either with regards to the underwriting process for a mortgage.
What this means for you as a self-employed person is that you need to be aware of what your true take home pay is and understand how that will affect how much credit you’re approved for.
3. Separate Business and Personal
Again, if you’re self-employed then hopefully these things are part of your daily bookkeeping. Sometimes separating business and personal spending and expenses is not such an elementary concept. If you’re looking at using your self-employment income to qualify for a home loan, make sure that you’re separating those two types of spending.
If you haven’t maintained separate records, start retroactively separating those expenses and creating documents that differentiate your business and personal spending and incomes.
The most important way to show that you’ve separated your business and personal finances is to prove that separate bank accounts exist for each respective entity. This little bit of extra work will pay dividends when you meet with your lender.
4. Boost Your Credit Score
Even a wildly successful businessman can have abysmal credit which can be a huge detriment to getting a loan. If you don’t know your credit score, you can check it for free once per year from the three credit reporting agencies: Experian, Equifax, and TransUnion. Knowing where you stand will go a long way in getting you in the home of your dreams.
If you already know your credit, then there are some basics you should know about your credit score including how it’s calculated and how certain events affect it.
If your credit is less-than-stellar, then there are some credit mistakes you can avoid or rectify in order to improve your credit without much additional effort on your part. No matter where you stand in your self-employment situation, knowing your credit and understanding how it will affect getting a loan can make a big difference in the end.
What’s Next?
Once you’ve gathered all of your self-employment documents, cleaned up any discrepancies, and made some improvements to your credit score, it’s time to get down to business. Take the next step and apply for a loan with Tidewater Mortgage Services, Inc.
This simple online application can get you pre-qualified for the mortgage you need for your new home and Tidewater’s Loan Officers can get you the right product for you and your family.
