Being your own boss has a lot of perks; you can make your own hours, work where you would like, and have more control over your day to day activities.  However, sometimes being self-employed can put a few more blocks on the road to homeownership over someone who isn’t self-employed when you are interested in obtaining a mortgage.  Here’s how to prepare for home ownership as a self-employed individual.

Things that are the same

A mortgage lender uses the same criteria for anyone applying for a loan.  They are looking at your income stability, credit score, and debt to income ratio.  The lender will ask for bank statements, proof of id, and tax returns from a self-employed individual just as they would from someone who works for a company when gathering information for a mortgage application.

Things that are different

As a self-employed individual a majority of lenders want to see two years of consistent self-employment before you are eligible for a mortgage loan.  They are looking for a consistent income as well. Unlike submitting a w-2 for people who work for a company, self-employed individuals have to do a little more documentation to prove their income to a lender.  These documents may include:

  • A profit and loss statement 
  • A business license or membership to an associate 
  • Two years of business tax returns
  • Two years of personal tax returns

Every lender may have different mortgage requirements for the exact paperwork they need.

Remember to Keep Records

As someone who is self-employed, I have gotten used to being a little more in tune with my finances than I was when I worked for another company.  Typically businesses take taxes out of paychecks.  When you are self-employed you do that yourself (hello fellow 1099ers!) so you really get to see how much money is going to the government with every estimated tax payment.  Because of this, you probably already have some of the paperwork a lender is going to want to secure your mortgage.  Make sure you keep a record of all your finances (income, business expenses, taxes, a profit and loss statement) because when a lender asks for this information they will want it in a timely manner. You’ll save yourself a lot of time if you don’t have to go searching for it.

Be Aware of Your DTI

DTI, debt to income ratio, is a calculation used by lenders to determine your eligibility for a mortgage.  Taking your monthly debts (car loan, credit card bill, student loans) and dividing it by your gross monthly income results in a percentage.  Different loans require different percentages to be qualified.  Paying off credit cards or car loans will help to improve this ratio.

Talk to an expert

Being self-employed doesn’t mean you cannot obtain a mortgage, it just means that there may be a few more steps in the process.  If you are unsure of where or how to start, reach out to a mortgage professional.  You can get advice for how to make yourself a great candidate for a mortgage, so even if you aren’t ready to buy a home today you can begin laying the groundwork for later.  If you are ever in need of a recommendation for a mortgage lender, let me know.  I will be happy to share some suggestions with you.