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Self employed mortgage: Tips for the self employed when buying a home

Self employed mortgage: Tips for the self employed when buying a home

When you’re self-employed and buying a home, there may be more asked of you in order to obtain a mortgage. Before starting your journey, know what some of the extra steps might be.

Buying a home can be different for self-employed homebuyers. Understand what’s expected of you and why, such as why a lender might need additional income documentation, and you’ll be better prepared to handle the home buying process.

There are a number of reasons why self-employed homebuyers face slightly different requirements. Cash flow and profitability are harder to predict with the self-employed homebuyer. That’s why it makes it riskier for a lender to loan you money. It’s important to start the process as prepared as possible, and know that it may take a little more work and more paperwork, but it can be done. Being prepared and organized is key.

A few things to consider if you are a self-employed homebuyer:

• How long you’ve been self-employed.
— Typically, lenders will not consider loaning to you if you have not been self-employed for at least two years.

• How much you earn from your business.
— Lender will average your income over two years (For example, if you earned $20,000 one year and then $40,000 the next, your income will be $30,000)
— If you’re a sole proprietor, the lender will look at your income after you’ve deducted expenses. If you make many deductions, your income may look lower than it actually is in the eyes of a lender.

• Some of the things you may need to provide if you are self-employed.
— Signed tax returns for the last two reporting years, both business and personal.
— Year-to-date profit and loss statement and balance sheet.

George, a Certified Public Accountant, explains some of the reasons things are different for self-employed homebuyers: “Self-employed people are kind of unique in the process of buying a home because, of course, they have their own businesses, so in a lot of cases the bank will want to see the three-years of the business, income and expenses. Actually, if you’re buying the home in the middle of the year, they may even want to see a midyear profit and loss for the business. A lot of times, businesses have depreciation, which is a noncash item. That’s important in the home-buying process because being noncash a lot of times the banks will add that back and allow them to make a larger payment or qualify for a larger payment.”

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VIDEO TRANSCRIPT:

STEPHANIE: If you’re self-employed, we want to make sure that you understand, as the buyer, what hoops you’re going to be asked to jump through, so that you have all your documentation up front—not once we find the house and we need everything now, now, now, but in advance so that you’re prepared and that you don’t start pulling your hair out when you’re asked for so much documentation.

GEORGE: Self-employed people are kind of unique in the process of buying a home because, of course, they have their own businesses, in a lot of cases the bank will want to see the three-years of the business, income and expenses. Actually, if you’re buying the home in the middle of the year, they may even want to see a midyear profit and loss for the business.

GEORGE: A lot of times, businesses have depreciation, which is a noncash item. That’s important in the home-buying process because being noncash a lot of times the banks will add that back and allow them to make a larger payment or qualify for a larger payment.

RHONDA: You have to go back to making sure you have financial statements, making sure if you have a CPA or an Accountant that does your books for you, being self-employed, that all of these things show and prove income. There’s no such thing anymore as stated income. I can’t just come in and tell you I have this money, there has to be proof, there has to be ongoing proof.

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