Obtaining a Mortgage When You are Self-employed
January 12, 2021
Self-employment can be liberating for many Americans seeking to ditch the 9 to 5, make an income for themselves, and otherwise gain the freedom of becoming their own boss. However, getting a mortgage or taking out any loan can actually be a bit more challenging for the self-employed.
Nevertheless, you can get a mortgage when you’re self-employed, but it may take a little extra preparation and work on your part. Let’s dive into that.
1. Keep Great Records
If you’re in business for yourself, hopefully, you already maintain accurate and detailed records, receipts, and documents stating your income and expenses. If that’s you, then you’re golden when it comes to getting a mortgage. If not, then you’ll likely need to begin preparing some documents to present to your lender.
Whether you’re a W-2 employee or self-employed, lenders will likely want to see at least a couple of years of income records. As an employee, naturally, that falls into the category of a W-2. For the self-employed, a simple profit and loss statement will generally suffice for proving your income.
2. Watch the Deductions
Deductions are a huge windfall for many self-employed individuals and help relieve the burden of paying more income taxes come April. They can, unfortunately, be a bit of a detriment when it comes to getting a mortgage.
When it comes to obtaining a home loan, lenders view income as total income after deductions. Just as W-2 employees can’t leverage their gross income, self-employed individuals can’t either with regards to the underwriting process for a mortgage.
What this means for you as a self-employed person is that you need to be aware of what your true take home pay is and understand how that will affect how much credit you’re approved for.
3. Separate Business and Personal
Again, if you’re self-employed then hopefully these things are part of your daily bookkeeping. Sometimes separating business and personal spending and expenses is not such an elementary concept. If you’re looking at using your self-employment income to qualify for a home loan, make sure that you’re separating those two types of spending.
If you haven’t maintained separate records, start retroactively separating those expenses and creating documents that differentiate your business and personal spending and incomes.
The most important way to show that you’ve separated your business and personal finances is to prove that separate bank accounts exist for each respective entity. This little bit of extra work will pay dividends when you meet with your lender.
4. Boost Your Credit Score
Even a wildly successful businessman can have abysmal credit which can be a huge detriment to getting a loan. If you don’t know your credit score, you can check it for free once per year from the three credit reporting agencies: Experian, Equifax, and TransUnion. Knowing where you stand will go a long way in getting you in the home of your dreams.
If you already know your credit, then there are some basics you should know about your credit score including how it’s calculated and how certain events affect it.
If your credit is less-than-stellar, there are some credit mistakes you can avoid or rectify in order to improve your credit without much additional effort on your part. No matter where you stand in your self-employment situation, knowing your credit and understanding how it will affect getting a loan can make a big difference in the end.
Once you’ve gathered all your self-employment documents, cleaned up any discrepancies, and made some improvements to your credit score, it’s time to get down to business.
How appraisals work
Property appraisal is the process of creating an estimate of value for real estate. Fair market value (FMV) is the price a property would sell for given a reasonable amount of time and assumes the buyer and seller know about all the details of the property. For the appraiser to get an accurate value, they must collect appropriate data and apply one or more approaches. He or she will then explain the appraisal decision in a final reconciliation of value.
In most cases, the buyer pays for the appraiser. However, there are many lenders that like to “do deals” on fees. That could include paying for the appraisal or making a contribution towards the cost.
No lender wants to risk their money. It is essential to know that the home is worth what the seller is asking. That is what the appraisal is all about. Checking all work recently carried out in the home is an important part of the procedure. Did the owner pull permits? Has the work been approved, and the permit closed? This means the appraiser may look at the same items as the home inspector.
The appraiser will go through the property for sale with a fine-tooth comb when conducting an appraisal. What an appraiser will check varies a little bit from state to state, but in general, you can rely on the appraiser to check the following:
· The location of the property. Is it an urban or rural area?
· State of repair, property improvements
· Lot size
· Size of the garage
· Zoning classification
· Environmental considerations.
· Has the home had any recent upgrades to make it greener?
A home appraisal is part of most real estate transactions. Therefore both the buyer and seller should understand what an appraisal is and how it can impact their purchase or sale. When a buyer knows who pays for an appraisal, they are able to budget accordingly. And when a seller knows what an appraisal entails, they can prepare ahead of time for the actual appraisal.
What is a warranty deed and how does it benefit homebuyers?
A warranty deed is a type of deed that indicates a seller owns a piece of real estate, free of claims against their ownership, and they have the right to sell it to a buyer.
3 Types of Warranty Deeds:
A warranty will often be accompanied by a title search. These searches are usually performed by companies that specialize in examining public records to confirm the legal ownership of a property, and see if there are any liens or claims against the property, along with any unpaid property taxes that could trigger a tax lien. Often this title search will go back to the legal genesis of the property. For most property in the United States, that is only around 200-300 years of age. But most title searches don’t need to go back more than 50 to 100 years in order to establish a clear title.
How to Get a Warranty Deed – When a home sale goes through the closing process, the buyer is often presented with a hard copy of the general warranty deed. It’s a good idea to hold onto this document and keep it in a safe place. However, if you should ever need a copy of it, or a replacement, you can secure one from the County Recorder’s Office of the county in which the property resides. Your mortgage company or the lawyer who assisted with the sale (if applicable) might also have copies on file. It is likely that you may be charged a nominal fee to procure a copy of the warranty deed, whether it’s a general, special, or quitclaim warranty.
Oftentimes, during the mortgage process, the one aspect that can bring the most angst is the credit pull. There are MANY reasons why a credit pull may present problems, some of which are:
1. Your credit score is too low
2. Your debt-to-income ratio is too high
3. The loan-to-value is too high
4. Your employment status may have recently changed
5. You have unusual bank account activity
Any of the above items, or a combination of items, may put a delay or even a halt on your mortgage loan application. But please remember that we are here to help. We are experts at working with people to get their credit where it needs to be to qualify for a mortgage. Whether that takes a few weeks, a few months, or even a year or more, we will work with you one-on-one until your dreams of homeownership become reality.
What makes rates change? (Financial Markets)
Changes in mortgage rates are an important factor in our decision to purchase houses or refinance existing mortgages. It makes us wonder, what really causes the mortgage rates to rise or fall? Well, there are several factors which impact mortgage rates.
In general, a growing economy leads to higher mortgage rates while a slowing economy leads to lower mortgage rates. One factor impacting mortgage rates in the United States is the Federal Reserve Board’s macroeconomic policy response to changing macroeconomic conditions.
Federal Reserve’s monetary policy objectives include:
(1) Maximum employment, which means all Americans that want to work are gainfully employed, and
(2) Stable prices for the goods and services we all purchase.
Another factor that affects mortgage rates is availability of credit. Based on macroeconomic conditions like prevailing unemployment levels, mortgage lenders may project an elevated risk of credit default.
In anticipation of a higher rate of credit default, lenders may tighten their underwriting guidelines. They might outright stop offering specific mortgage programs like jumbo loans or FHA mortgages, or price themselves out of the market, i.e. setting outrageously high rates for specific products.