Self employed borrowers normally have a tougher time qualifying for a residential mortgage loan than W-2 wage earners. Some lenders may be concerned that you won't earn a steady enough income to make your monthly payments, and others may simply not want to deal with the additional paperwork that can be involved in providing a mortgage to a self-employed person. Don't let anyone tell you that you'll never get a mortgage if you're self-employed, or that you shouldn't quit your day job to pursue your dream of running your own business until you've already purchased a home.
In general, mortgage lending guidelines require that self-employed borrowers provide two years tax returns in order for them to be eligible to qualify for a residential mortgage loan. Fannie Mae’s Automated Underwriting System will not issue an approve/eligible per DU FINDINGS unless self-employed borrowers have two years tax returns. However, Freddie Mac’s Automated Underwriting System will allow self-employed borrowers one year’s tax returns per LP FINDINGS if the mortgage loan applicant is a strong mortgage loan applicant. The key is partnering with a licensed and experience loan originator who is familiar with assisting self-employed borrowers.
For example, if the mortgage loan applicant has high credit scores, good income, large down payment, and substantial in reserves, it is very likely that Freddie Mac will only require one year tax returns for self-employed borrowers. If you are self-employed, NJ Lenders Corp. is eager to work with you. Many of our experienced loan originators are experts in assisting self-employed borrowers. There are mortgage products available for you as well as steps you can take to make yourself a more attractive loan candidate overall.
Make Yourself an Attractive Candidate
If you know you can make the payments, you can do some of the following things to improve your chances of getting a loan.
- Amplify Your Credit Score
In any type of borrowing situation, a higher credit score will make you a more attractive candidate to get the loan in the first place and to qualify for lower interest rates if you're approved.
- Offer a Large Down Payment
The higher your equity in the home, the less likely you are to walk away from it in times of financial strain. Therefore, the bank will see you as less of a risk if you put lots of cash into your purchase up front.
- Have Significant Cash Reserves
In addition to a large down payment, having plenty of money in an emergency fund shows lenders that even if your business takes a nosedive, you'll be able to keep making your monthly payments.
- Pay Off As Much as Your Consumer Debt as Possible
The fewer monthly debt payments you have going into the mortgage process, the easier it will be for you to make your mortgage payments. If you pay off your credit cards and car loans, you may even qualify for a higher loan amount because you'll have more cash flow.
The Bottom Line
If a W-2 employee loses his or her job, the person's income will drop to zero in the blink of an eye in the absence of unemployment insurance benefits; those who are self-employed often have multiple clients and are unlikely to lose all of them at once, giving them more job security than is commonly perceived. Of course, if you're self-employed, you're already used to having to work extra hard to file additional tax forms, secure business licenses, get new clients and keep your business running.