If you are your own boss, running your own business as a self-employed individual, applying for a mortgage and buying a home can be tricky. Typical mortgage applications are designed for people with predictable income and a W-2, so when you are self-employed it can be difficult of impossible to qualify.
These are some of the challenges you might face when buying a home and applying for a mortgage as a self employed person.
Difficulty Verifying Income When Buying a Home
One of the biggest challenges for self-employed individuals seeking a mortgage is income verification. Typically, mortgage lenders typically require several years of tax returns to verify income. However, you probably already know that self-employed individuals often take advantage of tax deductions and write-offs to reduce their taxable income. While this is beneficial at tax time, it can make it appear as though the borrower earns less than they actually do, which can reduce the amount they qualify for.
Buying a Home With Inconsistent Income
Self-employed individuals often experience fluctuating income due to the nature of their work, and this is another road block for the mortgage application process. Whether it’s seasonal work, varying client contracts, or inconsistent cash flow, these fluctuations can make it difficult for lenders to assess your long-term ability to repay a mortgage. In other words, lenders prefer to see consistent and predictable income, which can be a challenge to demonstrate if you are self-employed.
Higher Debt to Income Ratio
The debt-to-income (DTI) ratio is a key factor that lenders consider when approving a mortgage. For self-employed individuals, the DTI ratio can be skewed by business expenses that are written off as deductions on their tax returns. This can make it appear as though you have a higher debt load relative to your income, which may end up leading to a mortgage denial or a lower loan amount than you’re looking for.
With these challenges in mind, we have some great news. While many lenders won’t be able to help you, we probably can. We have years of experience helping our clients secure financing for their homes even when they can’t qualify with other lenders. For example, you might discover that a bank statement loan becomes the perfect solution for your scenario.
What is a bank statement loan?
Bank statement loans are designed specifically for borrowers who may not have traditional income documentation but can demonstrate financial stability through their bank account activity. Unlike traditional mortgages, which rely on tax returns and W-2 forms to verify income, bank statement loans allow borrowers to use their bank statements as proof of income. We typically look at 12 to 24 months of your bank statements to assess your income and financial health. This approach allows self-employed individuals to showcase their actual cash flow rather than their taxable income, which may be reduced due to deductions.
For self-employed individuals, gathering the extensive documentation required for a traditional mortgage can be overwhelming when buying a home. Bank statement loans streamline the documentation process by focusing primarily on bank statements. While some additional documentation may still be required (such as a letter from a CPA or a business license), the process is generally less burdensome than that of a traditional loan. We are often able to offer approval quite quickly, and can sometimes even offer a shorter escrow period (which can give you some negotiation leverage in a competitive real estate market).
If you’re new to bank statement loans and are in the process of buying a home, we want to help answer your questions so you can make a confident decision about the best financing for you.
Ready to learn more about buying a home and applying for a bank statement loan? Contact us any time.
