Buying a Home When You're Self-Employed

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Buying a home can be stressful for anyone and if you’re self-employed, this process can seem even more confusing or anxiety-inducing. While there are key differences in the home-buying process for those who are self-employed, there are no special requirements that make it more difficult for a self-employed applicant to obtain a mortgage.

Self-employed individuals are reviewed on the same guidelines for debt, credit, down payment and credit score as salaried or hourly-income applicants. However, being an applicant that works for themselves as a freelancer or business owner will require more documentation to verify that your income is stable.

We have put together a list of items that self-employed future homebuyers should have ready when it comes time to get approved for a mortgage. To obtain a home mortgage, the lender will ask for the following items:

Tax Returns

Most mortgage lenders require the last two years of complete tax returns with all schedules to qualify you for a mortgage. There are some exceptions though. If you can show you have been self-employed for more than 5 years you may be only required to provide the most recent tax returns. As a rule of thumb, make sure you have been self-employed for two years – individuals who have been self-employed for less than one year will more than likely not qualify. The lender will also look at the income from year to year. The income needs to be stable or increasing. If you are in a declining industry or you have lost income you may have an issue getting an approval.

Business License or Third Part Verification

If you are self-employed, you will need a business license to show your business is valid. If you don’t have a business license, you will need to provide a statement from a third party. The third party statement could be from your CPA or a notarized letter from a client or a recent paid invoice.

Year-to-Date Profit and Loss Statement

A year-to-date profit and loss statement is the summary of a business’ revenue and expenses. These statements include all financial transactions from the beginning of the current fiscal year to the current date. These statements are used to show a continuation of income, especially in the circumstance of one year’s income being higher or lower than other years. This will address any concerns about declining income, which is a risk characteristic lenders look for when making a loan approval.

2-3 Months of Bank Statements

As a self-employed applicant, you will need to present two to three months of bank statements. These are needed to show cash flow and to support cash flow of your income. The lender will look at any large deposits or any charges such as non-sufficient funds fees (NSF). These are fees that are charged as a result of attempting to process a transaction while not having enough funds to cover it in your account.

How is Self-Employed Income Calculated?

The lender will use a 24-month average of your income if your business has been in existence for the past 24 months. However, if your business has only been in existence for less than 24 months, you can still potentially qualify for a mortgage without the two years of tax returns.

Lenders use the following when calculating a self-employed consumer’s income:

  1. Take net income
  2. Add business use of the home
  3. Add depletion
  4. Add depreciation

Do this for each year’s income tax return and simply divide by 24. This is the average income lenders will use when qualifying you for a mortgage.

Being self-employed and looking for a mortgage can be a very easy process – as long as you make a plan and fully understand what you will need to complete the approval process. Follow our above tips, and you will be moving into the home of your dreams in no time. If you ever have any additional questions, check out all our resources on MichiganFirst.com. Additionally, we are always available by phone at 800.664.3828.

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