The U.S. Bureau of Labor Statistics estimates that more than 15.1 million Americans are self-employed. That’s up from an estimated 9.9 million at the end of 2012, as reported in a 2013 U.S. News & World Report article.
At PrimeLending, we think these numbers are impressive, because we feel it reflects an increase of people pursuing their dreams and building careers that they love. While we applaud our self-employed neighbors for their courage and vigor, we also sympathize with those that are simultaneously pursuing homeownership.
Self-employed homebuyers typically experience a more difficult time obtaining a home loan than homebuyers who have a more “traditional” job. It’s not an impossible feat; it just requires a lot more work and effort. Why? Proving a self-employed homebuyer’s financial stability can get a bit ambiguous.
“Show Me The Money!”
When applying for a home loan, self-employed homebuyers might find that proving their financial worth seems similar to Jerry Maguire proving his worth to Rod Tidwell in the movie, Jerry Maguire. But before we all start shouting, “Show me the money,” let’s review what banks and lenders look for in a loan application.
Because self-employed homebuyers can’t produce a traditional W2 as proof of income, they must produce copies of both personal and business tax returns from the two most recent years. Obtaining tax returns from the IRS requires particular protocol, so borrowers need to work directly with their lenders to obtain copies.
In addition to tax returns, lenders may require applicants to produce a quarterly profit-and-loss statement, a business license and statements from the homebuyer’s accountant and/or client(s). Applicants should also anticipate submitting proof of debts and assets, along with details of any savings accounts, mutual funds, brokerage accounts, etc.
Net Amount Vs. Gross Amount
A lot of confusion and frustration comes from the fact that lenders estimate a self-employed homebuyer’s financial capacity by averaging the net income listed on the tax returns, not the gross income. Depending on how many tax deductions are claimed, a borrower’s net income can look a lot slimmer than it actually is.
Tips To A Favorable Self-Employed Loan Application
With self-employment numbers soaring, it’s PrimeLending’s hope that we see an increase in approved loan applications for self-employed homebuyers. If you’re self-employed and thinking about applying for a home loan, consider these tips for preparing a more favorable self-employed loan application:
- Keep your personal and business finances separate.
- Refrain from taking too many tax deductions, as they lower your net income.
- Make sure your income shows a steady or upward progression year-over-year.
- Wait until you’ve been self-employed for at least two full years. Lenders like to see a stable work history. Borrowers with less than two years of self-employment can sometimes obtain a loan by showing that they were previously employed fulltime and working the same type of job, with no unemployment gap in between.
- Work with an accountant to review your financial statements and determine if you’re accruing enough income to afford your desired home.
- Stash some cash … not under your mattress, but in a secure savings account. Try building up six-to-12-months of income reserve to help show that you’re financially capable of taking on a mortgage.
- Consider purchasing an immediate annuity as another form of steady income. But do your homework to determine if this tactic makes sense for your future.
- Consider bringing in a trusted co-signer.
PrimeLending loves to make dreams come true for homebuyers of all career types. If you are self-employed and ready to buy a new home, schedule a meeting with a PrimeLending mortgage expert today. Our team will walk you through every step of your loan application process.
from the PrimeLending blog, by Mandy Jordan