“Can I really get a mortgage if I’m self employed?”
We come across this question often. And the answer is yes – as long as you meet the necessary criteria.
For self employed mortgage applicants, the process may be a little different, maybe with a few extra hurdles to clear, but certainly not impossible. The best way to approach the mortgage application process if you’re self employed is to be prepared.
Take a look at the following list of documents and qualifications you’ll likely need. Keep in mind that the specific requirements may vary from lender to lender and from loan to loan.
1. Tax returns for the past 2 years.
In order to see if you qualify for a mortgage, lenders want to know how much money you make. For W-2 employees, they can look at paycheck stubs to get an accurate idea of your monthly income. With self employed applicants, lenders may use your tax returns to calculate an estimated average monthly income. The way they usually do this is by taking your adjusted gross income (AGI) from each return, add them together, then divide the result by 24.
For example, if your AGI for 2014 and 2015 was $40,000 and $35,000 respectively, your “average monthly income” would be $3,125.
2. Profit and Loss Statement
If you own your own business, you will likely need to provide your lender with a profit and loss (P&L) statement. These can also be referred to as “statement of profit and loss,” “income statement,” “statement of operations,” “statement of financial results,” or “income and expense statement.”
Basically, the P&L shows the lender how much money your business makes and how much it spends. Hopefully, your business consistently makes a profit. If it doesn’t, you may have more difficulty getting a loan, or you may have to pay a higher mortgage rate.
3. A Good DTI Ratio
Your debt to income (DTI) ratio is a figure that lenders rely on when evaluating whether or not you can afford a mortgage. DTI is calculated like this:
monthly debt payments / gross monthly income = DTI
For instance, let’s say your monthly debt payments add up to $1,500. And let’s say your gross monthly income is $3,500. Your DTI would be 0.428 (or 43%).
For most mortgage applicants (i.e. W-2 employees), 43% is generally the max DTI you can have and still qualify for a mortgage. For self employed borrowers, the DTI maximums will most likely need to be lower.
There are two types of DTI ratios: front end and back end. The front end DTI includes your housing-related debts. The back end DTI includes housing-related debts as well as other recurring debt payments (things like student loans, credit cards, child support, etc.).
Most lenders want you to have a front end DTI of no more than 28 percent as a self employed borrower. As for the back end, lenders will typically allow a maximum of 36 percent.
As a self employed mortgage applicant, you will want to make sure your DTIs come in at or below these maximums.
4. A Good Credit Score
Your credit score and history are good indicators of how well you can handle debt. Do you make regular, on-time payments? Do you refrain from taking out more debt than you can afford? Do you use credit consistently but not carelessly? These are all things that lenders want to know and your credit score is the easiest way to answer those questions.
Obviously, the better your credit score, the more likely you are to qualify for a mortgage. You’ll also be more likely to qualify for a competitive interest rate if you have a high credit score.
Different lenders may have different requirements when it comes to credit scores. The best thing to do is check your credit score for free before you begin the mortgage application process. You can do so once a year through the three major credit bureaus: TransUnion, Equifax and Experian.
Once you know your credit score, talk to one of our mortgage professionals and see which loan programs you are likely to qualify for.
If you have any other questions, feel free to reach out to our team of mortgage professionals. We’ll happily answer your questions and provide you with expert home financing advice that is personalized to your needs.
We're dedicated to helping borrowers find the right home loan program for their situation. Contact us today for a free quote and consultation.
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