Getting a mortgage if you're self-employed
Self-employed people and others with irregular income could be caught in a squeeze as mortgage lenders continue tightening lending guidelines in response to the problems in the lending industry.
On paper, self-employed people and owners of so-called micro businesses with 10 or fewer employees can look like credit risks. Their income can vary widely from year to year. Most don’t receive W-2 tax forms, making their income harder to document. And after they deduct business expenses from their income for tax purposes, they can appear to make little money.
With many flexible loans like no-documentation mortgages drying up, self-employed people could find it more difficult to get a home loan, according to Gene Fairbrother, lead small-business consultant for the Dallas-based National Association for the Self-Employed.
“We could move back to the way it was 10 years ago,” Fairbrother said. “If a self-employed individual went to any kind of lender and tried to get a loan for a mortgage, you could have a great deal of difficulty finding a lender that would touch you.”
The importance of good credit
The most important thing is to be sure you have a high credit score, known as a FICO score, said Fairbrother. He advises annually checking your credit reports from the three major credit reporting agencies, Experian®, Equifax® and TransUnion®. Mistakes on your credit report can artificially pull down your credit score.
If your financial habits are pulling down your credit scores, change them now.
“Credit histories are absolutely critical,” Fairbrother said. “If you’re looking at getting a mortgage in the next 90 days, you can’t fix your FICO score in 90 days. It takes six months, nine months, a year.” (For more on raising your score, read our article: Improving your credit score.)
Keep good records
Self-employed individuals also need to keep good financial records, he said. You might need to provide both your personal and your business tax returns when applying for a loan.
If you’re anticipating applying for a mortgage in the next year or two, consider deducting fewer expenses to increase your net income, he added. Lenders usually require self-employed people to provide copies of their previous two years’ annual tax returns.
Scott Keegan, executive director of the National Association of Mortgage Professionals, says lenders now have greater expectations for self-employed people to prove their income. If tax returns don’t do that, consider providing an audited financial statement, he said, although getting a certified public accountant to prepare the statement can cost several hundred dollars.
Fairbrother also advises getting prequalified for a mortgage loan so you’re sure how much house you can afford.
Despite the challenges, the small-business expert notes that he believes self-employed people who handle their finances carefully will still be able to get mortgages.
“I’m not concerned; I think the money is still going to be out there,” he said. “It will be like back in the ‘90s when there was a lending crisis. It was a bump in the road, and then back to normal.”
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