Even in the best of lending environments, a self employed home buyer often encounter difficulty when attempting to secure a real estate mortgage. Lenders review a business’s health before approving loans in addition to scrutinizing tax returns, savings and debt obligations and credit. The good news? Getting a loan when you’re self employed isn’t impossible, but planning in advance is essential.
Order your credit reports for free through AnnualCreditReport.com. Lenders want to see scores of at least 680 and probably higher. To improve a marginal score or maintain a high score, don’t ever pay bills late. Don’t max out your credit cards, and dispute reporting errors immediately. Improving credit takes time, and the more serious your credit problems are, the longer they will take to repair.
Next, limit the number of deductions you take on your income tax returns. While deductions are handy, they also lower your income in the eyes of lenders (and the IRS). Keep in mind that you’ll probably owe more income tax, so speak with a professional before making any serious adjustments. Lenders want to see excellent steady income from your business – period.
Third, you need history, more so than garden-variety buyers who work for traditional employers. Expect to provide at least two years — probably three and maybe even more — of tax returns and business income history.
Finally, during the mortgage lending heyday, lenders happily accepted “no doc” or no-money-down loans – or both. Those days are long gone, so expect to put down at least 15 to 20 percent.
If you’re not yet ready, don’t give up. While self -employed buyers must work twice as hard to demonstrate professionalism and responsibility, you’ll probably be in a much better place financially than most of your peers.