Seems like everyone wants to be a freelancer or start their own business these days, but when it comes to getting a home loan, self-employed is viewed as a barrier to home ownership. In fact, most people think there is zero chance to get a home loan without a regular “day job”, especially with tighter requirements over the past few years. (Thank you real estate mortgage meltdown).
But fear no more: With these tips and good planning, the dream of home ownership can be just as realistic as someone “working for the man.”
Here are five top tips to get a home loan:
#1 Have Legit Two Years of Fed Tax Returns
Home loan-worthiness for the self-employed is weighted squarely on documented, average income from the past two years. And it needs to be proven with Federal income tax returns—your own documentation will not cut it. There are no exceptions, like showing your 1099 paystubs or P&L statements. Income in the year you apply for a home mortgage can be a compensating factor, but it’s really about what you made the last two years.
#2 Maintain or Up Credit Score
Just like applicants with W-2 income, your credit score will be a part of the home loan equation. Across the home mortgage industry, a credit score of 700 or above is best. Do your homework before applying for a home loan and get your credit score from one of the Big Three credit report agencies, (requesting one will trigger all three). Make sure there are no mistakes to clean up or that the score won’t pass muster. Bonus: credit reports are free.
#3 Curb Debt-to-Income Ratio (DTI)
Even if you made $500,000 peddling your cool new app the past few years, if your debt-to-income ratio is above 45% you absolutely will not get a loan. That also means maintaining a desirable loan profile without large debt, so consider holding out on the new car, club membership, or other large expenditure until the loan process is completed.
#4 Watch Business Expenses: the Catch-22
People that are self-employed sometimes want it both ways. They want to expense everything but also show a high income. You either pay now or later. In other words be cautiously conservative but truthful about your business expenses with 1099 income.
#5 Go to an Expert
There are not that many home loan options for the self-employed. Notify your realtor at the beginning of your home search that you have your own business so they can connect you with a knowledgeable resource. Or do your own research to find best local lenders that are familiar with this application profile.
Bonus Tip: Don’t Count Your Chickens…
Like any loan, remain hopeful, but don’t assume a pre-approval letter translates to “done deal”. Wait until you sign the underwriter’s official documents before popping the champagne.
The bottom-line? You don’t have to decide between self-employment and home ownership to snag a home mortgage—you just have to plan a little better.