Getting A Mortgage When Self-Employed
You finally started your own business. It was a big step, but now the dust has settled and you feel ready to buy a house. However, it seems like all the mortgage products and advice out there are geared towards people who work for an employer.
Sound familiar? It’s daunting enough to make the leap to self-employment, and buying a house or refinancing while doing so might also seem like venturing into the unknown. It can be tough to know what kind of mortgage is reasonable, especially if you are still investing in your businesses’ growth.
The good news is that there are many self-employed people out there who own homes—and there are plenty of self-employed mortgage loan options.
How much can I borrow for a mortgage while self-employed?
As with any home buying experience, an affordability calculator can help estimate how much home you can afford. Your credit rating will, of course, also affect the size of your home loan. But if you have good credit and a solid income from your business, you can expect to borrow on terms similar to formally employed individuals.
The primary challenge of being self-employed and applying for a mortgage is calculating your income—and providing the necessary proof and paperwork to a lender.
How to calculate self-employed income for a mortgage
Take two years of tax returns and average them for adjusted gross income. This number will be used by lenders to evaluate your finances.
Just as for someone who collects W-2s, lenders need to calculate your ability to repay a loan. This means evaluating the strength and stability of your business. While it’s not always completely fair, lenders might consider a self-employed person to be a higher risk.
As such, here is other information that you’ll likely need to provide:
Accounting of items like depreciation, amortization, interest, and taxes
The more information you can provide to prove your business or self-employed income is rock solid, the easier it will be for lenders to approve a loan. A bookkeeper can put your financial information together but be sure to run it by your CPA as well.
A lender will also look at your debt-to-income ratio. For those who are married, this will include the total income of the household.
Always keep your CPA in the know
Getting all the documents and information in order is complicated and working closely with a CPA will prove invaluable. Make sure that your CPA has experience working with self-employed individuals—as well as the personal touch to meet your needs.
“Your CPA should know about your goals when they are working closely with you,” says Kelli Loo, CPA and financial advisor for many small business owners. “What often happens with a high-volume firm is that they'll talk once a year, take your numbers, and write off whatever they can. It can make it really difficult to get financing.” A good CPA will look at the whole picture and what you are wanting to do—in your business and in your personal life.
For example, you might have taken many tax deductions related to your business. While often a good financial strategy, this can make your income look smaller than you’d like for mortgage purposes. A trusted CPA can help determine if the returns can be amended.
Can I refinance my mortgage when I’m self-employed?
You’re not limited to just financing a home purchase! If you’re self-employed, you can also refinance a mortgage as anyone else might. The same principles will apply: have as much documentation as possible and do everything you can to show the extent of your income. Check out a refinance calculator to crunch potential numbers before talking to a loan officer.
Talk with a private mortgage lender for self-employed home loans
Getting a loan while self-employed is a daunting process, but at DC Lending our mortgage professionals will present you with all possible options. As a family run firm, we will take the time and personal touch to find the very best match for your needs. Whether it's a conventional loan, FHA, or another type of mortgage, we'll help you through the process.
Homeownership or refinancing is within reach given the proper work and planning--even when self-employed!