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According to the latest data released by the U.S. Bureau of Labor Statistics, over 9.6 million self-employed Americans have considered purchasing a home. But how do you get approved for a mortgage if you’re self-employed—especially with fluctuating income, loads of tax write-offs, and no W2s?
While it is certainly true that self-employed people have a unique set of challenges in securing mortgage approval, recent changes have given applicants increased access to homeownership. That said, if you’re seeking mortgage approval and are self-employed, here’s what you’ll need.
Pull Tax Returns
Until recently, mortgage applicants were required to produce tax returns from two consecutive years. That’s changed. Self-employed applicants only need to show one year of business tax returns. However, there is one caveat: You must demonstrate a full year of work experience in your field.
Keep Extra Income to Yourself
Lenders typically require mortgage borrowers to show all income, including hourly, part-time, retirement, and gig work. That’s changed. If the income generated from your “salaried” job meets lender requirements, you no longer have to report supplemental income.
Prepare a Profit-and-Loss Statement
Lenders generally require borrowers to show 30 days of pay stubs. But since most self-employed people do not have pay stubs, they must submit a profit and loss statement—a document showing your business’s net profits and losses, usually for the entire year.
These financial documents prove the viability of your business to lenders. That is, whether you are operating a profitable business.
Gather Bank Statements
Like any conventional or FHA loan applicant, self-employed people must still submit bank statements to lenders. Why? You must make a 3.5 to 20 percent down payment when you purchase a home. Lenders want to measure your debt-to-income (DTI) ratio and see evidence that you can make that down payment, pay your mortgage and home insurance, and cover additional living expenses.
Tighten Up Your DTI (Debt-to-Income) Ratio
To calculate your DTI, add up all of your recurring monthly debts, including car payments, rent and mortgage costs, credit card debts, and more. Now divide that number by your total income before taxes and deductions. That’s your DTI.
Minimum DTI requirements vary, but most lenders require a DTI of 43 percent or less. In other words, only 43 percent of your gross monthly income should go towards debt repayment.
Check Your Credit Score
Credit score minimums vary by lender. However, most require borrowers to have minimum credit scores between 580 and 620. And to increase approval odds, it is ideal for borrowers to have a credit score of 740. If your credit score needs improvement, try to pay off existing debt.
Nikkael Home Loans: Your Mortgage Specialist
Want to learn more about mortgage options? Nikkael Home Loans has 60 years of combined experience in mortgage law, loan origination, and home protection. We’re also attorney-owned and operated, so we have a higher level of ethics and accountability than you might find elsewhere. We will help you navigate through the mortgage process. Request rates today to get started!
