Buying a Home July 18, 2022

Mortgage Tips for the Self-Employed

More people have become self-employed in recent years, but when looking to become a homeowner, what does that mean for securing a mortgage? Self-employed entrepreneurs are seen as a greater risk, and often, successful self-employed workers never apply because they believe they will not qualify. But don’t give up on home ownership! You can take steps to boost your credibility with lenders. Here are a few tips to help you on your path to pre-approval:

  1. Lower your income-to-debt ratio. While a high income is excellent, your debt-to-income ratio is more important to lenders. This is the percentage of your gross monthly income that goes towards debts like credit cards, car loans, and your potential mortgage payment. The lower this number is, the better chance you will be approved for a loan. To lower your debt-to-income ratio, make extra payments on your existing debts each month or consider paying off some debts altogether.
  2. Keep your personal and business accounts separate. This will make it easier for lenders to see a clear picture of your finances. Plus, it’ll help you stay organized come tax time.
  3. Document everything. When you’re self-employed, lenders will want to see a two-year history of your business income. Be sure to keep detailed records of your revenue and expenses. This could include tax returns, profit and loss statements, and bank statements.
  4. Deduct less on your taxes. When you’re self-employed, you can deduct several business expenses from your taxes. But when it comes to qualifying for a mortgage, it’s best to minimize your deductions. This will result in a higher taxable income, which will make you look more appealing to lenders.
  5. Register and pay yourself on a W-2 form. If you’re incorporated, lenders may require that you document your income with a W-2 form. This is the same form used to report wages for traditional employees. To get a W-2 form, you’ll need to register your business with the IRS and pay yourself a salary.
  6. Work with a lender who specializes in loans for self-employed borrowers. You may have to shop around to find a lender who understands the unique challenges of financing a home when you’re self-employed. But it’s worth it to find someone who can help you navigate the process and get the best loan terms possible.

If you’re self-employed and looking to buy a home, don’t get discouraged. With careful planning and preparation, you can increase your chances of getting pre-approved for a mortgage. Use these tips to make the process smoother and put you on the path to home ownership. I’d be happy to put you in touch with lenders and help you with your real estate needs!