There are 15 million self-employed workers in the United States, according to the Bureau of Labor Statistics. While that’s well and good, when it comes to securing a home loan, self-employed people have to work extra hard to obtain a mortgage. Here, Redfin recommends some tactics self-employed individuals can take to improve their chances of getting approved for a mortgage:
1) Have the proper documentation
Although employed applicants are asked to provide W-2 forms as proof of income, self-employed borrowers must show their 1040 tax returns, including all schedules. Unfortunately, self-employed tax filers write off expenses that W-2 employees can’t. So, their net income after write-offs is much lower that it would be otherwise. This can hurt your debt-to- income ratio and make it more difficult to qualify for a mortgage. The key: Show a net income, after write-offs, that meets the debt-to- income ratio lenders prefer, typically from 36 percent to 43 percent.
2) Be willing to pay more for your mortgage
Some lenders look at self-employed applicants as high-risk borrowers. That means self-employed borrowers might have to settle for a slightly higher interest rate. However, with once you’ve amassed a solid payment history, you might be able to refinance at a lower rate down the line.
3) Improve your odds of being approved
If you’re self-employed, there are several moves you can make to enhance your chance of getting a home loan. This includes registering and licensing your business; paying yourself a W-2 wage rather than an owner’s draw; lowering your debt load; reducing your tax deductions; keeping separate business and personal accounts; using tools such as QuickBooks to help track and classify income and expenses and to generate a profit and loss statement (which lenders often require from sole proprietors); and making a larger down payment by tapping into your IRA or 401(k). You also might want to consider establishing a relationship and working with another small business, such as a local credit union or mortgage company.
