Becoming a business owner is the dream of millions of Americans and many have been able to pull themselves out of a financial funk by doing just that. But what about when a self-employed individual wants to own their own home? Many people who are self-employed think there’s no way they will ever be able to obtain a mortgage. But the reality is that owning your own home is not impossible if you’re your own boss; it’s just more involved.
Are You Really Self-Employed?
The common definition of a self-employed individual is one who either receives a 1099 or owns more than twenty-five percent of their business. If this sounds like you, then you are self-employed and will be applying for a mortgage loan as such.
In order to apply for a loan as a self-employed person, however, you will need to provide that you not only have sufficient income, but that your income is steady, at least over the past two years. This will tell your lender that you are able to make your mortgage payments.
What to Expect As a Self-Employed Borrower
Applying for a mortgage and being self-employed will mean that you will likely wait longer for loan approval. This is because many lenders don’t consider self-employed individuals to be the best type of borrower. This perspective will also cause most lenders to require a larger down payment, and then pay higher monthly mortgage payments than the borrower who has an official employer.
As a self-employed person, you will also have to provide much more documentation than the average borrower might. Included in the list of required documents is two years’ worth of tax returns, profit and loss statements for that timeframe and a balance sheet that has been put together by a professional company. New rules laid down by the FHA require that self-employed mortgage applicants have profit and loss statements in year-to-date form. However, this is only required if it’s been more than one quarter since the applicant’s last tax return filing.
If your business has been around for fewer than two years, then you may have an even harder time obtaining a mortgage. While it used to be that self-employed individuals could depend on the incomes they stated on mortgage applications, this was before today’s strict laws requiring documentation. Providing as much of that documentation as possible provides the lender with some sort of pattern, which offers a guideline for them to follow when making their decision about your application.
Using Business Money for A Down Payment
Using business funds for a down payment on a home is certainly possible. But, it will require two things: the borrower owning at least 51% of the business, and a statement from a certified professional accountant that using business money for the down payment will not affect the business in a negative manner.
On the property side, the business owner must be the one who plans to reside in the home. In other words, money from the business cannot be used for the down payment on a property that the applicant plans to rent out to other parties.
Other Items to Consider
Just as with applicants with employers, a self-employed individual will need to ensure they have good credit before they apply for a mortgage. The best rates on a conventional mortgage can be had with a minimum score of 620 for a regular loan, and 640 for an FHA loan. Of course, any score above 740 will result in the lowest rates.
Self-employed individuals, like other applicants, will also need to ensure they have some kind of cash reserves in place before they apply. Although the amounts will differ from lender to lender, experts recommend having at least two months’ worth of mortgage payments tucked away.
Experts also suggest meeting in person, as doing so can mean more wiggle room in terms of the loan packages available and therefore, more chances of qualifying for one loan if you don’t for another.
Guest author Sam Dickson writes on a variety of topics related to the mortgage industry. He recommends www.home-mortgage-calculator.com as a free calculator to help crunch the numbers and information on how to go about taking out a home loan.