If you are among the thousands of Americans who turned the dark cloud of the recession into the silver lining of becoming self-employed, you may feel you are now in a position to refinance your mortgage or to buy a home. Even with good credit and sufficient assets, though, you'll find that even the best mortgage lenders will require you to produce your tax returns and possibly a quarterly profit-and-loss statement in order to establish that you have sufficient income to make your mortgage payments.
SEE: 9 Things To Know Before You Refinance Your Mortgage
Most mortgage applicants today are prepared to go through a few hoops to qualify for a mortgage, but if you're self-employed you may need more than a quick comparison of the best mortgage rates to find the best mortgage for you. If you're new to self-employment, you will need to wait until you have two years of tax returns filed before you can be approved for a new mortgage in order to include your self-employment income in your loan application.
All borrowers today need good credit, with a score of 620, 640 or above for a Federal Housing Administration (FHA) loan and a score of 740 or higher to be offered the best mortgage rates for a conventional loan. Some lenders consider self-employment income as a higher risk than regular paychecks, so a higher credit score can offset your potential risk factors and give a lender greater confidence when qualifying you for a loan. Check your credit report to see if you have negative information that can be corrected or improved before you apply.
SEE: 3 Easy Ways To Improve Your Credit Score
Low Debt-to-Income Ratio
Lenders typically like to see an overall debt-to-income ratio of 41% or less, although borrowers with other compensating factors may still qualify for a mortgage with a ratio as high as 45%. You can use a mortgage calculator to estimate your housing costs along with your other debt. If you can pay off some bills to reduce your debt-to-income ratio that can be another compensating factor in your favor.
Many self-employed individuals reduce their income for tax purposes by deducting business expenses. Be aware that your income for a mortgage loan will be the income stated on your tax returns. So if your income is too low, you may qualify for a smaller mortgage amount than you thought. Your income will usually be the average of your two most recent tax returns, even if you made more money this year than last year, it may not matter to your lender. Lenders often require a quarterly profit-and-loss statement in addition to your most recent tax returns. New rules from the FHA say that self-employed borrowers are required to prove their ongoing income in the form of a year-to-date profit and loss statement if more than one quarter has passed since the last tax return was filed.
SEE: Surviving On An Irregular Income
If you are refinancing, your mortgage will be based on the amount of your home equity. If you, like many other homeowners, experienced declining home values in your area, you may want to consider a "cash-in" refinance. A cash-in refinance builds your home equity faster and, if you are underwater on your home loan, can bring you back above water. If you're buying a home, a bigger down payment can make it easier to qualify for a mortgage since the loan amount will be smaller.
The rules about how much you need to have in cash reserves varies from one lender to another and for different mortgage products, but you should have at least two months or more of housing payments (principal, interest, taxes and insurance) in the bank to protect yourself in an emergency. Lenders particularly need to know that self-employed borrowers, whose income often fluctuates more than regular employees, can handle their finances and have savings.
The Bottom Line
If you are self-employed and have solid income, assets and good credit, you are likely to be able to qualify for a mortgage as long as you provide the documentation needed to your lender.
SEE: Starting A Small Business: Making The Leap
InsuranceA force majeure clause frees both parties in a contract from fulfilling their obligations in the event of some catastrophic or unexpected occurrence.
Credit & LoansAn equated monthly installment is a fixed payment a borrower makes to a lender on the same date of each month.
ProfessionalsSmall business owners think they are immune to hacks because of their size, but they are not. When they find the guard is down, hackers are exploiting common weakness.
EntrepreneurshipDiscover the backgrounds of some of the most successful Korean entrepreneurs and information about the companies and projects leading to their success.
EntrepreneurshipDiscover the educational backgrounds and entrepreneurial ventures of some of the most successful and well-known African entrepreneurs.
EntrepreneurshipUnderstand what makes Sweden a great place for entrepreneurship. Learn about five successful Swedish entrepreneurs who are making big impacts.
InvestingHere are some ways to turn what you love to do for fun into your job.
EntrepreneurshipUnderstand why so many socially conscious entrepreneurs have come out of Mexico. Learn about the top most successful Mexican entrepreneurs.
InvestingOprah Gail Winfrey is an American media magnate, television and film producer, and talk show host with a net worth of roughly $3 billion.
EntrepreneurshipThe reality of living in the twenty-first century is that customers find business information and product offerings predominantly on websites, and small businesses without an online presence ...
You have several options for reducing your debt burden. You can enroll in a professional debt management plan, or consider ... Read Full Answer >>
Filing bankruptcy is never a simple decision, but sometimes it is the best thing you can do in your current financial situation. ... Read Full Answer >>
In general, the Social Security Administration, or SSA, does not encourage citizens to change their Social Security numbers, ... Read Full Answer >>
The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
Partnership insurance is actually quite common. Most of the time, partners buy insurance to safeguard against the possibility ... Read Full Answer >>
Financial sampling allows auditors to approximate the rate of error within financial statements. For accounting purposes, ... Read Full Answer >>