Why is it harder to get a mortgage if you are self-employed?

By: Paul Defgnin, Mortgage Banker

Being self-employed can come with many perks: flexible hours, long lunch breaks, and always agreeing with your boss. However, when it’s time to buy a home and you’re looking to get a mortgage loan, self-employment can present many challenges in comparison to someone who is salaried. Obtaining a mortgage while being self-employed requires more time, effort, additional documentation and various other challenges including:

Not being able to rely solely on deposits or cash-flows going into business or personal accounts as qualified income

• Needing two years of tax returns
• If you are a partner, a member of a limited company or incorporated in business, you are required to provide various financial documents including, an unaudited year to date profit & loss statement, a balance sheet, and a third-party CPA letter.
• In most cases, you are required to have 2 years of self-employment history in the same business for the income to be considered qualifying income
• If your income fluctuates, it can pose a problem when a lender is considering your ability to repay the loan

Although self-employment presents many obstacles, obtaining a mortgage is still achievable. By educating yourself on the solutions when faced with these challenges, the process can run smoothly and mortgage approval is possible. These solutions include:

• Getting organized and having all your documents in order. 
• Keeping business and personal accounts separate 
• Being prepared to provide additional documents before starting the process including but not limited to 2 years tax returns and other business tax forms
• Ensuring that you have 2 years self-employment history before you apply
• Providing a record that your income is consistent or increasing. If your documents show that your income is declining, be sure to write an explanation and provide documentation if it is an isolated event
• Minimizing how many expenses will affect your net income
• Providing independent verification of your self-employment

Regrettably, sometimes even having all of the necessary documents in order is not enough for lender approval. Frequently lenders and mortgage bankers do not understand how to read self-employment borrowers’ tax returns and will not take the time to learn. The main issue is not proving your income, but it is instead finding an experienced mortgage broker who is able to read your tax returns to assess how much you qualify to borrow.

If you are self-employed and are in need of a reputable Mortgage Banker that understands and has experience working with self-employed borrowers, contact me to get the process started.