What is the best way to get a mortgage as Self Employed?

​It’s true. Getting a conventional mortgage as a W-2 employee may be easier than if you’re self-employed, but it’s still doable.

​You just have to know upfront the additional hoops you’ll have to jump through to get a mortgage as self employed.

We break it all down for you here.

​It’s important to understand that lenders don’t necessarily see the self-employed as the ideal borrower.

Employees applying for a mortgage are considered more creditworthy because of their steady, reliable incomes. This is especially true if they have excellent credit scores.

For the self-employed, some lenders may be concerned that they won’t provide steady income to make regular monthly mortgage payments.

That’s why self-employed borrowers will have to provide more documentation of income compared to a traditional employee who can produce a W-2.

Add to this that the self-employed deduct a lot of business expenses to reduce taxable income. Great for taxes, but not so great when it comes to buying a home.

Finally, lenders may want to see a lower loan-to-value ratio. That means the self-employed will need to come up with a larger down payment.

For self-employed borrowers who know they can make regular monthly mortgage payments, preparation for your lender is key!

Here’s what you’ll need.

High Credit Score

Good credit is everything! Make sure you have a higher credit score. If you don’t have a good score, work to clean it up before applying for a mortgage loan.

The higher your score, the more attractive you are to a lending institution.

Down Payment

Make sure you have a large down payment. A bank will see you as less of a risk if you have a large down payment. It also shows the bank that you are responsible enough to save money throughout the year while being self-employed.

Cash Reserves

Besides a sizable down payment, show that you have plenty of money stashed away in an savings account. Lenders like to know that even if your business falls on lean times, you are still able to make your monthly mortgage payment.

Consumer Debt

Get rid of as much consumer debt as possible. Pay off car loans and credit cards. Doing so may qualify you for a higher loan amount because you’ll have more cash flow.

Documentation is Essential

Full documentation of income through tax returns, balance sheets, and profit and loss statements will increase the chance of qualifying for a loan. Be prepared to provide the following:

• Bank statements
• Debt list and monthly payments
• Proof of business such as a business license, statement from your accountant
• Asset list such as investment accounts, savings accounts
• Any additional sources of income such as alimony, Social Security payment

Bank Statement Loan

Another possibility includes bank statement loans, or alternative document loans, which allow a borrower to apply for a mortgage loan without providing traditional documents that prove income such as tax returns and W-2s.

Lenders instead look at 12-24 months of your bank statements to determine your business income. This loan has higher interest rates because the lender is taking on more risk.

Joint Mortgage

If your significant other or spouse is a W-2 employee, it makes sense to have them as a co-borrower on the loan with you. This provides more assurance to the lender that there is another source of steady income.

Other possibilities for a joint mortgage include parents or a trusted friend.

Conclusion

It may take a bit more work, knowledge, and patience, but the self-employed can find ways to qualify for and get a mortgage.