According to the Bureau of Labor Statistics, there are more than 15 million people in the United States who are self-employed. There are many advantages to being your own boss but there can be downsides as well. One big downside is getting approved for loans – especially mortgage loans.
At Berkshire Hathaway HomeServices we are proud to offer full services for real estate buyers. Keep reading to find out more about how a self-employed person can increase their chances of getting approved for a mortgage. Then contact us at (310) 373-0021 if you are ready to start the process of buying or selling a home.
Some aspects of the process are the same for everyone
Whether you’re a W2 employee or self-employed, you will have to fill out an application and you will need to provide documentation of your income. The requirements for down payments, debt-to-income ratios, and credit scores are the same for people who are self-employed. The main difference in this part of the process is that self-employed people must provide the 1040 form from their tax returns while wage earners will need only their W2s.
Your net income is likely lower than it would be for a wage earner
One thing that can get in the way for a self-employed person is the fact that are often eligible to write off many of their expenses. This is great when it comes to lowering their tax burden but it can also lower their net income – which negatively affects their debt-to-income ratio. Some lenders consider self-employed people to be higher risk and will charge them higher interest rates.
The seven steps you can take to increase your chances of being approved
Though not all self-employed people would be eligible to complete these seven steps, each of them can have an impact on loan approval:
- Register and license your company.
- Keep separate bank accounts for business and personal needs.
- Pay yourself a W2 wage.
- Pay off debt.
- Lower your deductions
- Keep great records if income and expenses.
- Be ready to make a larger down payment.
Again, you may not be able to do all of these – for example, it does not make sense to pay yourself a W2 wage if you are the only employee of your company – but following just one or two of these tips can make a difference.
Remember that while there may be more hoops to jump through, it is not impossible for you to get approved for a mortgage. The number of self-employed Americans has been rising in recent years and many mortgage lenders are making adjustments to reflect these changes. To find out more about what your options are in buying a home, work with Berkshire Hathaway HomeServices by calling (310) 373-0021.