Getting a mortgage while self-employed may be difficult because it adds additional layers of risk. However, it is not impossible. The key to securing financing is to prove to the underwriter that you, as the borrower, have had steady, consistent income on your last two years of tax returns.
A self-employed borrower is defined as someone who owns more than 25 percent of a business and/or who receives a 1099. These tips can help with obtaining a mortgage:
- Plan: Unfortunately, some lenders won’t view the self-employed as ideal borrowers and therefore getting a loan will take longer. In general, you can expect to pay a larger down payment and higher rates than those listed with many mortgage companies. We recommend working with a mortgage professional a year in advance to determine what the income level needs to be to obtain a property within a reasonable price range and the best mortgage option.
- Manage cash flow: Small business owners usually take maximum deductions to keep their net profits and personal income lower to keep taxes low. However, this reduces cash flow, which may jeopardize a mortgage since they are based on income. Work with an accountant to find the right balance between tax deductions and positive cash flow. Self-employed borrowers may have to sacrifice tax cuts to increase income to the level required by lenders.
- Keep records: Self-employed borrowers will need to provide extensive documentation about their finances, including: two years of income tax returns with all schedules, a professionally prepared balance sheet for that period and profit and loss statements. Credit reports will need to be provided as well. You must complete Internal Revenue Service Form 4506-T, which allows lenders to request tax transcripts. Lenders are required to wait until the tax returns have been recorded by the IRS and must receive them directly from the IRS rather than from loan applicants.
- Use of business funds: In order to use business funds for a down payment, the borrower must own at least 51 percent of the business and a CPA must state that taking money out will not negatively impact the business. Plus, the property must be owner-occupied; business funds cannot be used to purchase rental properties. The mortgage lender will assess your ability to use those funds as part of your regular cash flow. Mainly, borrowers will need to provide a CPA letter showing that the use of those funds does not impact the cash flow of the sole proprietorship business.
If your income has declined, the income cannot be averaged; only the most recent year’s income will be used. However, if the borrower’s income significantly increased over the past two years, the income will be averaged. Basically, the borrower is at the underwriter’s discretion.
If you are self-employed and have solid income, a high credit score and positive assets, you should be able to qualify for a mortgage.
Celebrating its 10th anniversary, A and N Mortgage Services, Inc. opened in 2002 as a small mortgage company with big plans. When the real estate market crashed in 2008, most of the big banks were consolidating and large companies were scrambling to survive. A and N was the exception. Today, five years after the real estate market crash, A and N has grown to fifty employees and is one of the top mortgage firms in Chicago, rated A+ by the Better Business Bureau for seven consecutive years and named one of the Top Ten Most Dependable Mortgage Brokers in Chicago Magazine in 2007. A and N is a hub for learning in the Chicagoland real estate community, dedicated to keeping Realtors informed and educated through free educational seminars and workshops led by industry experts. In addition to mortgage services for residential and one-to-four unit properties, A and N is a Credit Union Service Provider and offers businesses a Corporate Lending Program for employees.