I’m self-employed. The vast majority of my colleagues are self-employed. I’m also saving up for a house, and the biggest question mark I hear in our community around this subject is:
How difficult is it, really, to get a mortgage when you’re self-employed?
Here to answer that and other questions about self-employed mortgages is PenFed Credit Union loan officer, Neil Cannon.
Let’s do this.
What documents should I prepare to apply for a mortgage as a self-employed individual?
Tax returns that contain all schedules, like K-1s, business tax returns if the borrower owns 25% or more of a business and year-to-date profit & loss statements.
When I’m getting ready to apply, how many years back should I have this documentation?
Standard underwriting is 2 full years and the year-to-date profit & loss statement. You will want to be prepared to go back farther if there is more to the narrative.
Should self-employment be established for a specific amount of time before applying for a mortgage?
Yes. Any type of self-employed income must have a two year track record that can be documented with tax returns.
What is the formula used to determine the max loan amount?
Gross monthly income *(43%) > Borrower’s overall debt obligations including the mortgage they desire
Is there anything a self-employed individual can do to improve their chances of approval?
There is no specific wording or documentation that increases their chances of approval.
The best opportunity for approval is full disclosure and transparency with their loan officer as the loan officer knows what information is required and what can be excluded. Therefore, the borrower should put all their cards on the table.
The loan officer will then work to help the borrower reach their homeownership goal.
Let’s say you have a dual-income household where one partner is employed traditionally and the other is self-employed. Both have identical credit scores and income, and can qualify for a mortgage with only one of their incomes. Should they leave the self-employed partner off of the application?
The borrowers would want to decide if they want to be jointly obligated on the loan.
The self-employed borrower needs to assess their personal risk exposure to the home acquisition and financing.
An individual who owns a Schedule C – Sole Proprietorship should also consider that their businesses are owned by individuals and the individual has unlimited personal liability for all debts of the business. This may have an impact on whether they choose to be on a the loan as the owner of a sole proprietorship could be found liable for damages or the debts of the business are overwhelming the business, the owner’s personal assets [including the house] are at risk of being seized.
In the case of single-income households or households with single parents where all income comes from self-employment, do you have any specific insights?
Yes, though these tips could apply to all homebuyers:
Work with your loan officer and be as transparent as possible. Different people are going to have different solutions and different factors that work better for them.
Underwriters primarily want to see consistent income, and secondarily gradually increasing income.
Be sure to declare all assets you have so the loan officer can provide different options for you to consider.
VA loans are a great option for our veterans because they do not require a down payment. They do, however, require parents to declare child care expenses for all children under the age of 14.
Be sure to have a loan officer you trust so you can get the best guidance possible. Then tell them everything. During the process, we find out anyway.
Much thanks to Neil for answering these questions! How about you, readers? What are some of the mortgage questions you have as a self-employed individual?
*This post is in collaboration with PenFed Credit Union, an Equal Housing Lender.*
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