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The truth is that the process of getting approved for a mortgage when you’re self-employed can more complex than it would be if you worked a 9-5 job. That said, it’s not impossible. Read on below to learn what you need to do in order to receive the green light and, with a little preparation, you’ll be ready to hit the housing market before you know it.
Have two years of tax returns on hand
Being able to prove that you have a source of stable income and a consistent work history are two of the keys to getting approved. While, traditionally, this proof would come in the form of a W-2, for those who are self-employed, it’s all about your tax returns.
Typically, lenders look for you to have two years of a stable (or growing) documented income, so you’ll want to be sure that you have your last two tax returns ready to go. If you own your own business, your lender may also ask to see additional documents such as a profit and loss statement or statements from your business accounts.
In either case, when you’re getting ready to buy a home, it may be wise to start working with an accountant who can help you organize all the necessary paperwork. That way, you can be sure that you didn’t overlook or forget anything that you may need for future documentation.
Minimize your deductions
Most freelancers and self-employed individuals know all about tax deductions. For the most part, taking deductions can be a helpful way to reduce the overall tax bill that you’ll be expected to pay. However, when you’re getting ready to buy a home, taking lots of deductions can actually hurt your chances of being approved.
Typically, when lenders set about improving self-employed individuals for a loan, they look at their after-deduction – or net – income. With that in mind, for the two years you’re supplying income information, you’ll want your tax returns to be as high-net as possible.
While taking fewer deductions may mean paying a higher tax bill now, it may also mean that you get approved for a higher loan amount once you’re eventually ready to buy.
Make sure your other qualifying factors are in good shape
Truth be told, your tax returns are only one of the factors that lenders look at when deciding whether or not to approve you for a loan. Other factors include your credit score, your debt-to-income ratio, and the amount of funds that you have on hand.
Since your income can be up-and-down when you’re self-employed, you’ll want to do everything you can to ensure that the other elements in your financial package are in good shape. That way, even if the lender questions your income, you’ll have other qualifications to fall back on.
With that in mind, before you apply for a loan, take the time to build your credit score, pay down your debts, and save up towards making a sizable down payment. If you’re unsure which factors will have the biggest impact for you, reach out to a lender who can review the specifics of your financial situation and offer advice.
Shop around for the right lender
While you should always shop around for a lender, taking this step is even more important when you work for yourself. Since your financial package is a bit unconventional, you’ll want to focus on finding a lender who’s willing to work with you, rather than just searching for the best rate.
As you interview lenders, make sure to ask about whether or not they have experience working with self-employed individuals. Ask how their qualifying standards differ for those with inconsistent incomes and if they have any specific loan products that might be a good fit.