How To Buy a Home When You’re Self Employed

Self-employed? Securing a mortgage can be trickier for you than for a traditionally employed buyer. It’s true that you follow much of the same process: you submit an application, and lenders will consider your credit score, how much debt you have, your assets, and your income, too.

The difference is how lenders verify your income. When you’re self-employed, lenders can’t verify your income with your employer. Instead, they require documentation to confirm that your income is stable.

Read on to find out how to prepare to buy a home when you’re self-employed.

How do you qualify?

Remember, for the self-employed, the mortgage loan process is the same. It’s the difference in documentation requirements that’s significant. Debt-to-income ratios, down payment, and credit requirements are all the same, but unlike buyers with W-2s, self-employed buyers must supply 1040 tax returns, including all schedules.

And that’s where it gets tricky. Self-employed buyers are typically allowed to write off more things than buyers with W-2s, decreasing their net income and hurting their debt-to-income ratio. The key is to keep your debt-to-income ratio within your lender's requirements.

What are lenders looking for?

The good news is that if you’re self-employed, there are several things you can do to make your mortgage application more appealing. Make sure to register and license your business, pay yourself a W-2 wage rather than an owner’s draw, and lower your debt load. Keeping business and personal accounts is also a great practice.

What documentation do you need?

If you’re a self-employed home buyer, you must maintain excellent records. For starters, mortgage lenders will require 1040 tax returns, all schedules, and profit and loss statements.

Make sure you’re using a tool like QuickBooks to help track and classify income and expenses and generate those necessary profit and loss statements.

But if you’re self-employed, you’re typically well organized and accustomed to keeping track of your income. So when the time comes to provide all the documentation, you should be able to provide everything your lender requires.

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