Perhaps working from home during the pandemic inspired you to start a business. As any self-employed individual knows, there’s nothing quite like being your own boss.
Self-employment means you can work from almost anywhere, set your own hours and make other important decisions as you chase your big dream. At the same time, people who are self-employed may worry about securing financing for other investments, such as buying a home. Rest assured that self-employment is not a hurdle toward homeownership.
It’s true that W-2s and other related documents can streamline the mortgage application process and are immediately made available by employers. People who are self-employed, however, will need to do a little extra groundwork.
If your self-employed and dream of owning your own home, here are some mortgage essentials to keep in mind for the road ahead.
Documents you will need
Entrepreneurs who have at least a 25% stake in a business fall under the self-employed category. In this case, you will be asked by the lender to provide proof of income that can cover every expense, including the mortgage.
Given the pandemic and the unique situation of each self-employed applicant, lenders might require different documents that speak to the business’s financial standing. Generally, applicants should be prepared to provide at least two years of tax returns, personal and business bank statements covering three to six months, year-to-date profit and loss statement and verification that the business is currently up and running.
The big factor
Lenders are happy to work with anyone dreaming of owning a home. Given the lender’s substantial financial stake, all applicants must demonstrate an ability to be responsible for the size of the loan and the monthly payment. But as a self-employed individual, your applications will require a few extra steps.
Your financial stability is the primary factor. Depending on your type of business, seasonal financial ups and downs are expected. That’s why it’s important to show multiple years of financial history so lenders can see the entire picture.
Underwriters will conduct a cash-flow analysis from your various income sources, including net profits, interest and other earnings. The lending team will carefully calculate how much you qualify for based on your financial health.
Prepare for success
Business owners can increase their chances of getting a loan they want in a few easy steps. They can scale back on write-offs, for instance, to boost their qualifying income for a loan.
And just like other consumers, self-employed individuals can work on their loan prospects by improving their credit score, securing a large down payment, holding off on any major purchases and practicing other money-saving measures.