The economic downturn decimated the job market, freezing hiring and causing massive layoffs. One side effect of this was the dramatic rise in self-employment. Faced with a lack of viable companies to work for, more and more people decided to work for themselves. This presented a problem, however, when these new entrepreneurs attempted to secure a mortgage loan.
Getting a loan as a self-employed person has never been easy, as verifying a steady source of income is difficult for the lender. This has only been made worse by new policies instituted by banks due to the 2008 meltdown. Luckily, there are ways to ease this process for those of us whom work for ourselves.
Establish Your Business
First and foremost, you are going to want to run your business for at least two years before applying for a mortgage. The reason you want to do this is mainly because lenders use the last two years of tax returns to establish income stability. This illustrates a pattern, and proves to the lender that you can handle the monthly payments for the loan. If you do not establish this pattern, you will not be able to show the lender convincing proof that you can pay off the mortgage. This will almost certainly sink your application before it even gets past the first stage.
Document Your Income
Next, you want documentation of all of your income. If a lender wants to know how much money you made in October two years ago, you had better have that information. Being meticulous about your income records will serve as an assurance to the lender that you are responsible with your finances, and will be a reliable investment. Keep in mind, however, that the paperwork requirements vary between lenders. Always ask about a lender’s specific requirements so you can make sure you are prepared.
One of the bigger benefits of being self-employed is the ability to claim your own business expenses on your taxes. However, a lot of self-employed borrowers have developed a habit of claiming a bit more than they should as business expenses. This helps secure lower taxes, but it actually may end up hurting you when it comes to applying for a loan. Lenders look at net taxable income when determining loan viability, and the more expenses you claim the lower that number gets. This doesn’t mean that you can’t claim legitimate or large business expenses. You may want to consider holding off on some of the more expendable ones until you have already secured a loan, however.
Lastly, having a good credit score is something that every borrower should pursue. It is even more important for those who are self-employed, however. Good credit further identifies you as a trustworthy borrower, which may serve to soften the resistance many lenders will want to put up when you apply for a loan. Building that credit is a subject for another post, however.
Being self-employed can be a very rewarding and convenient choice for many people, but it has its own share of challenges. By keeping accurate records, having a good credit score, claiming fewer business expenses, and waiting to establish your business before applying, mortgage loans can be eliminated as one of those challenges.