Being self-employed is exciting, and adventurous as well as challenging. You can set your own hours and decide your own income. You have the satisfaction of building something that is all your own instead of building something for someone else.
Obtain a Mortgage When You are Newly Self-Employed
One of the challenges of being self- employed is to secure a mortgage, especially with little self-employment history. Self- employed applicants must prove that they have stability in employment and income, and the standard requirement is about two years with documented proof.
There is good news though if you are recently self-employed. You might be able to use just one year of tax return documentation to qualify for a mortgage.
Traditional Self- Employment Mortgage Qualification
A self-employed loan applicant is someone who owns 25% or greater interest in a business. According to conventional mortgage guidelines published by Fannie Mae, an underwriter looks for the following qualifications in self-employed loan applicants:
- Stability in income
- Location and nature of the borrower’s business
- Demand for the product or service the borrower’s business provides
- Financial vitality or strength of the business
- Future projections or estimated outlook of the business
The two biggest factors that an underwriter is going to scrutinize here are the stability and consistency. Underwriters measure stability by looking at how long the applicant has been in the specific line of business they are currently in. Generally, an underwriter is looking for at least two years of longevity.
There is an exception to the two years of business history.
Let’s paint a picture of how a person who has been self-employed for only a year could be approved for a home loan:
- Lindsay wants to buy a home in San Francisco. She owns a very successful interior design business that she started just over 15 months ago. Her latest tax return shows a year of net profit at $120,000 for her first year in business. Before Lindsay started her company she worked a few years for one of the city’s largest design firms and made an annual salary of $100,000 a year
Lindsay’s work history in the same field of work for a large stable company before successfully venturing out on her own to make more money for herself paints a picture of stability. She will likely be approved for a home loan with the right documentation. This would include her latest full-year tax return.
If you have this kind of solid previous work history in the same field of work an underwriter might not ask you to provide the full two years of tax returns and documentation. Many home loans are first run through a computerized underwriting system and then verified by a real underwriter. There are loan programs that only require one year of tax return information.
Additional: Is a 20 Year Home Loan the Best?
If you have been self-employed for less than two years, but have been working in the same line of work for far longer, ask your lender if they can help you to get approved on a loan application.
Buying a home when you are self-employed can be more challenging than it is for the average employee, but when you have a general idea of how the underwriting process works for self-employed applicants you can ask the right questions and hopefully be approved for a home loan.
I specialize in finding unique home loan options for self-employed applicants to get them approved. Contact me today for help securing a mortgage for self-employed applicants.