Realizing that the tax deadline is approaching at breakneck speed, I started to think about the differences between receiving a W-2 and being self-employed. Employees have the luxury of showing their prospective lenders W-2s or pay stubs to secure a loan. Individuals who are self-employed have probably heard that it will be harder for them to get a loan versus an employee.
That isn’t always the case, however. Being self-employed is not a barrier to securing a loan with favorable terms. As long as a borrower can provide two years’ worth of tax returns that show increasing net income, it should not be a problem to get purchase money. The income does not even have to be all that substantial, if it has increased.
The key point is that lenders will look at the net income on the tax return, not the gross income. This is a particularly important fact to consider at this time of year. While it may often be in a self-employed person’s best interest to maximize deductions and show the least amount of net income possible, that strategy could definitely sabotage any effort to get a loan.
There are a number of additional methods for increasing your chances of securing a loan if you are self-employed:
But wait, I’ve only been in business a year!
- Eliminate other debts. Paying off car loans and credit cards will make it easier to get a loan. It could also help you qualify for a higher loan amount.
- Have documentation ready. When applying for a loan you will need to fully document your income, whether it’s through tax returns from previous years, profit and loss statements, balance sheets, savings statements or other paperwork.
- Bring a substantial down payment. Lenders appreciate the commitment it requires to accumulate a large down payment.
- Maintain a coffer of cash reserves. Having cash available if things go south will make lenders happy.
- Get a co-signer. A parent or relative who is willing to share responsibility will improve your chances.
- Show a proven track record. Being able to prove your success as a self-employed individual will make lenders look at you more favorably.
Don’t worry. If you have only been self-employed for a year it could certainly be possible to secure financing for a home, especially if it was a successful year. This actually brings me to another important point to consider if you are self-employed and shopping for a home, which is that it’s vital to work with a lender who is experienced in this area.
As a mortgage broker, it is my job to exercise a little creativity if necessary and help identify a plausible solution for obtaining a loan. In the past this has meant working directly with accountants and tax advisers – basically whatever it takes to help people achieve their goals and facilitate increased levels of homeownership in our communities.
For a free consultation about your options, contact me and I’ll help you develop a strategy that is unique to your situation.
Patrick Stoy has 15 years of mortgage lending experience. Patrick is CEO of Wilmington-based Market Consulting Mortgage, which he started in 2005 with a mission to build lifelong customer relationships by providing real value. To learn more about Marketing Consulting Mortgage, visit www.macmtg.com
. Patrick can be reached at [email protected]