How to qualify for a mortgage when your self employed

Getting a mortgage as a business owner is more challenging than getting a mortgage as an employee.

Lenders consider self-employed individuals to be at greater risk of defaulting on a mortgage because their incomes vary, sometimes significantly, from month to month. An unsteady income means potential problems with making regular, timely house payments.

That means you’ll face more scrutiny and must meet tougher requirements to qualify for a mortgage. And even if you meet every lender requirement, you might be forced to pay a slightly higher mortgage rate or take out an FHA loan.

Here are 6 things to consider when applying for a loan:

You don’t have to own the whole business for lenders to consider you to be self-employed.

If you own 25% of more of a business, even if you also have a full-time job as an employee elsewhere, you will be evaluated as a self-employed applicant because of underwriting requirements — even if you don’t need or want to use your self-employment income to qualify for a mortgage.

That’s because owning 25% or more of a business can put non-business assets at risk. If there is a business loss, the borrower might try to cover the shortfall using personal income or assets.

You’ll need a strong earnings track record.

You must have at least a two-year history of income from your business and must reasonably expect it to continue for at least the next three years.

If your self-employment income is stable or increasing, lenders will use an average of the two most recent years’ net income for qualifying purposes. If your self-employment income is decreasing, lenders may only use the most recent, lower figure for qualifying purposes to make a more conservative estimate of your ability to pay.

Tax deductions can hurt you.

Lenders look at net income, not gross income, so business tax deductions lower your qualifying income for your mortgage when you’re self-employed. If this standard seems unfair, it really isn’t — money that you’re spending on your business is money you don’t have to pay your mortgage.

That being said, some lenders may allow certain tax deductions — like depreciation, amortization, casualty losses and loss carryovers — to be added back to net income for qualification purposes.

Lenders want your tax returns.

Since you can’t provide paystubs from an employer to prove your income, you’ll need to provide copies of your completed, signed tax returns, including all schedules, for the two most recent years. The lender will verify these returns by requesting official copies from the IRS.

Some lenders also will require self-employed applicants to submit a signed and dated year-to-date balance sheet and income statement for the business.

You’ll need to prove creditworthiness.

As a self-employed borrower, you’ll still need to meet the same criteria as employee borrowers, like having a good-to-excellent credit score, sufficient down payment and several months’ worth of savings in the bank. You’ll also need to present bank statements and investment account statements to document your financial stability.

Use a mortgage broker.

Since most loans are sold in the secondary mortgage market, if there isn’t a demand for a mortgage held by a self-employed person in this market, it can be difficult to get a mortgage.

Self-employed applicants should try going through a mortgage broker who can match them with the appropriate lender for their situation.

Mortgage brokers who specialize in helping the self-employed secure mortgages can sometimes get to the bottom of problems caused by the underwriting software that most lenders use and that may automatically reject your application.

If you can’t get a loan, brokers can also point out changes you can make so you’ll be a more attractive mortgage candidate despite being self-employed.