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You love being self-employed. You enjoy the work you do, you have control over your hours and you even get to set the dress code. But there are a couple of things you don’t get, like a 401(K) employer match program and paid sick days. If you have anything but the most successful business a lot of lenders won’t be eager to give you a mortgage with good terms either. Still, it is possible to get a good mortgage if you’re self-employed and your business is doing fairly well.
The paperwork
Getting a mortgage is difficult from the very beginning. Most lenders will demand two years of tax returns as well as all the regular documents used to identify you and determine your creditworthiness. If your business is incorporated the mortgage lenders will also request a corporate tax return.
How tax deductions can harm you at mortgage time
One of your favorite things about being self-employed—the ability to write off expenses so you don’t have to pay such high taxes—is actually one of the most harmful come tax time. This is because lenders are using your tax returns to try to determine what your income is. If your business has a lot of expenses, this can make your income appear far smaller than it is.
Some lenders will allow certain deductions to be added back onto your income, usually large one time purchases, but many banks won’t.
The easiest way around this is to write off fewer expenses during the two years before you actually seek out a mortgage.
The down payment
If you want to get the best deal on your mortgage you’re going to have to put more money down than somebody who has a regular job. You can expect to pay at least 15% for your down payment if you want a good deal, whereas most salaried workers who take out mortgages only have to put down 14.6%. It sounds like a small difference, but this can really add up depending on the size of the overall mortgage.
Uncomfortable questions
Some lenders will want to know more about your business than you may actually be comfortable sharing, such as the names of specific clients or contact information. If you’re feeling uncomfortable, run away from the lender as fast as you can! There are lenders out there who understand the plight of small business owners.
The bottom line
Getting a mortgage is difficult when you’re self employed but it can be done. The sooner you start preparing for purchase, the easier it will be.
