If you’re like most homebuyers, you’ll need to secure a mortgage loan before closing on your dream home. In fact, 88% of all homes purchased in the past year were financed through mortgages, while the remainder were bought outright. While applying for a mortgage can be nerve wracking for many, it’s generally a straightforward process. You prepare a series of financial documents and follow each step of the application process as directed by your broker.
For most people with steady, traditional employment this runs rather smoothly. But what if you are self-employed? Financial records tend to be more complex with this group. Lenders also tend to worry that self-employed income could suddenly dry up at any time. But while self-employed mortgage applicants are more highly scrutinized, they do regularly win mortgage approval. The key is to file the required paperwork in a way that most appeals to lenders.
Following are some important ways to improve your chances of mortgage approval while being self employed:
Showing your income:
Being self employed means having a non traditional income. Your income will likely vary month to month. You may also have a trail of cash, check and digital payments for which you may or may not keep accurate records. But you can show income through filed taxes and profit and loss statements. So be prepared to tidy up your records and be able to speak about your business income. In the eyes of mortgage lenders, they are interested in seeing mortgage applicants not only have a high income but also one that is steady and consistent. Mortgage lenders will look at your tax returns from past to present. If there is a large fluctuation in income lenders will want to know why. Even if your income has had a large increase, you should still have an explanation for this as lenders will want to know that your income is stable enough to take on a mortgage.
You’ll need to provide documentation that proves your creditworthiness in the eyes of mortgage lenders. This includes:
- Federal tax returns for at least 2 years (you may be asked for more).
- Statements regarding your business profits and losses.
- A copy of your business license, if applicable.
- Supporting documents from your CPA showing a consistent income for at least 2 years.
- Bank statements for 1-2 years.
All of your reported income will be verified by your lender using the IRS 4506-T form. When you sign this document, you give your lender permission to order copies of your tax returns in a summary type statement. Your mortgage lender will review not only the information you submitted but also other factors such as dependents you may have, expenses that haven’t been paid back or other home property expenses. Considering this, it’s better to disclose all financial aspects of your life upfront, including things you may feel are unflattering to you as an applicant.
Having your paperwork lined up in a way that makes you look like a financially stable and qualified applicant while being self-employed isn’t out of reach. If some factors of your financial situation worry you, having a good credit score may help increase your approval odds. It’s advisable to work with financial professionals such as your CPA to assist you in a smooth application process.
For more information on buying apartments in New York City, contact us today at (646) 202-1877.