When you’re self-employed and you want to buy a home, you fill out the same application as everyone else. Lenders also consider the same things: your credit score, how much debt you have, your assets and your income.
So what’s different? When you work for someone else, lenders go to your employer to verify the amount and history of that income, and how likely it is you’ll keep earning it.
Qualifying For A Mortgage When You’re Self-Employed
If you work for yourself, you’re probably already used to having to be more organized and keeping track of your income. That’ll help when it’s time to apply for a mortgage, and so will this overview of what to know and how to prepare.
What Are Lenders Looking For?
You can expect lenders will want proof of the following things before considering you for a mortgage:
- Income stability
- The location and nature of your self-employment
- The financial strength of your business
- The ability of your business to generate sufficient income in the future
What Documents Do You Need To Provide?
To start, you’ll need a history of uninterrupted self-employment income, usually for at least two years. Here’s some examples of documents a lender might ask for.
Employment verification is proof that you’re self-employed. It could include emails or letters from the following:
- Current clients
- A licensed certified personal accountant (CPA)
- A professional organization that can attest to your membership
- Any state or business license that you hold
- Evidence of insurance for your business
- A Doing Business As (DBA)
Have proof of steady, reliable income and you’re one step closer to getting approved for a mortgage. Note that even if you make consistent money now, your past income will also influence your ability to get a loan. Your lender will ask for the following:
- Personal tax returns (including W-2s if you’re paid through your corporation)
- Profit and loss forms, which could include a Schedule C, Form 1120S or K-1, depending on your business structure
What happens if you’ve been self-employed for less than two years?
Great question. Ultimately, your business must be active for a minimum of 12 consecutive months and your most recent two years of employment (including non-self employment) must be verified. In this situation, your lender will likely do an in-depth look at your training and education to determine whether your business can continue a track record of stability.
Tips To Put Your Best Application Forward
As your own boss, you want your business to look its best to prospective clients, in whatever form that takes. As someone who wants to buy a home, you want your application and financial status to look its best to lenders.
Tip 1: Check Your Debt-To-Income Ratio
Your debt-to-income ratio, or DTI, is the percentage of your gross monthly income that goes toward paying your monthly debts. Lenders pay attention to it because you’re a less risky borrower when your DTI is low. That means you have more budget for a mortgage payment.
To calculate your DTI, divide your monthly recurring debt by your monthly income before taxes. Fluctuating monthly bills such as utilities, property taxes, groceries and repairs aren’t considered debts and aren’t taken into consideration when calculating DTI.
If your DTI is more than 50% and you want to get a mortgage, focus on reducing your debt before applying.
Tip 2: Keep An Eye On Your Credit
Lenders look at your score as an indication of your ability to repay your debts. It doesn’t take your income into consideration. Unlike your DTI, the higher your credit score, the more favorable position you’ll be in for a mortgage.
Another factor to your credit score lenders consider is your credit utilization. This ratio measures how much of your available credit you use.
For example, if you have a credit limit of $10,000 and have a $6,000 balance on it, your ratio is 0.60, or 60%. Like your DTI, the lower your credit utilization ratio, the better it is for your credit score, which means it’s better for your mortgage application.
Tip 3: Keep Business Expenses Separate
If you charge business purchases, such as a new computer or office supplies, to your personal card, you’ll increase your credit utilization and that could have a negative effect on your application.
Keep separate accounts and credit cards for business and personal expenses to craft a favorable and more truthful financial profile on your application.
In order to apply for a mortgage while self-employed, you'll need to verify and document your income, maintain a lower DTI and higher credit score. Rocket Mortgage® by Quicken Loans® can help you figure out which solution is right for your situation.
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