Being your own boss is a great feeling with many benefits, but those benefits do not include a fast track to a great mortgage. Gone are the days of the easy mortgages, the no-income-verification loans, and The Big Short. In fact, qualifying for a mortgage may rank as one of the biggest challenges you face as someone who is self-employed.
However, given that the 30-year rates have plunged below 3%, marking the lowest they’ve been in over a month, you should move quickly because now is a great time for refinancing and home buying to lock in those historically low rates. According to data company Black Knight, “In the U.S., homeowners withdrew $63 billion in equity from their properties through more than 1.1 million cash-out refinances in the second quarter of the year — the largest quarterly volume since mid-2007”. As you can see from the data, with these all-time lows, now is the time to act.
As a self-employed business owner who just bought a new home for our growing family, I can testify that the mortgage process is not for the faint-hearted. Every time I completed a lender’s checklist they come back to me for more information. This was not my first mortgage but the time and energy it took this time around was beyond what I expected – and I’m a credit-worthy borrower and financial pro with a background in the mortgage world.
So what’s the best way to prepare? To understand the issues, think like a bank. In deciding to lend you hundreds of thousands of dollars, the bank wants to know, first and foremost, that you will be able to pay them back – steadily, regularly, over time.
Here are 3 of the biggest hurdles you may have to overcome:
SHOW YOU MEET THE INCOME REQUIREMENTS
The first thing a potential lender asks to see is your W-2 form, the document that shows salaried workers’ annual wages and withheld taxes. Business owners and independent contractors are unlikely to have W2s, and instead need to present their full tax returns, including profit & loss and deductions & depreciation, as well as their own income.
Not only are lenders not likely to be expert at understanding your business and your cash flow, but the salary you show on paper may be deceptively low. That’s because most business owners invest a sizable chunk “back into the business” when they’re getting started as well as taking deductions for travel, leased vehicles, and purchases of computers, office supplies, and even their phone.
Getting ready: If you’re thinking about buying a house, consult a financial planner, your accountant, or a trusted mortgage professional (we’ve suggested a few below) about how much to accurately deduct – or not – this year to show sufficient income and an acceptable debt-to-income ratio.
HAVE ALL THE PAPERWORK
Having paperwork that tells the full story can make all the difference, so now is the perfect time to prepare a file with the documents you’ve already collected for the IRS. Remember, though, that this year’s tax returns and records may not be enough to show your business has been steadily growing. Be prepared with records from previous years, and bonus points for data about how your sector has been doing as well.
Getting ready: Keeping good records is key so if you haven’t already started, get started now, and see what you can put together for previous years.
MAKE SENSE OF COMPLEXITY
Every company and every consultant is unique and it may be hard to reconcile your business’ specific challenges and trajectory with the solid predictability a mortgage lender is looking for. You may want to bring a trusted accountant or financial or business advisor to the meeting with the lender – someone who knows your business well and can explain its structure, operations, and cash flow in context. If your advisor can’t be there, ask them to write a brief document explaining your data. Consider also requesting profit-and-loss statements prepared without personal expenses to show the difference between reported income and actual income.
Getting ready: be prepared to explain what your numbers mean in context and turn to a trusted advisor, if possible, who can translate your numbers for the lender and help them understand you’re a good candidate.
AVOID CREDIT SCORE SURPRISES
You wouldn’t be the first, or last, person to find discrepancies in your credit score. Correct any discrepancies and make sure it’s correctly updated before applying for a mortgage. And – obviously – pay off any outstanding debt.
Getting ready: get credit reports from the major agencies and make sure that they are accurate.
If you’re in the market for a new home, let us help you and guide you through the process. With interest rates at all-time lows, whether applying for a mortgage or refinancing, we are happy to schedule a call with you for a free analysis of how that may affect your purchasing power.
We are well versed in the latest options from different lenders that may be most appropriate for your situation and have online tools to help you look at your overall financial situation to determine how much of a mortgage it makes sense for you to take on. We also have resources and experts we can refer you to, or, if you already have a mortgage professional, we will work with them to determine how much your can afford.
And we have experience: I’m pleased to report that, after what seemed like a never ending process, I succeeded in getting a mortgage with very favorable terms and – most importantly – we love our new home.
Don’t be daunted by the challenges involved with getting a mortgage when you’re working for yourself. With the right preparation and the right help, you too can make your dream home a reality!
Here are three resources trusted referral partners in the Washington area:
(As a fee-only financial planner, we have no financial vested interest in referrals. We just want to make sure you have the best advice possible!)
Jody H. Eichenblatt, Senior Mortgage Consultant at Prosperity Home Mortgage
Josh Friedson, Senior Vice President of Mortgage Lending at Guaranteed Rate
The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions. They are for information purposes only. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
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