A majority of people desire to be self-employed and live out the dream of controlling their own life. Quite a bit of the US population is self-employed. This is a great achievement, but it does come with challenges. In addition to the long hours, you have a lot of things to track and take care of to secure your financial future. One of the biggest challenges can be securing a mortgage to buy a home for you and your family. Let's take a look at some of the challenges that may arise when trying to apply for a mortgage while being self-employed.
Challenges for Self-Employed Home Buyers
Hard to qualify
As a self-employed person, you can declare a lower income with your write-offs. This lowers the amount of income tax you will pay. However, when it comes to applying for a mortgage this can be tricky because they often use taxable income as a measuring tool to qualify you for the loan. Your mortgage lender will see your documents and look at the number that is substantially less than your take home and this will lower the amount you qualify for.
When you are employed by someone else you collect a paycheck from them consistently based on the pay period. This means you have consistent income that you can verify. A self-employed person has a harder time showing consistent income to the lender, depending on their situation. Lenders are looking for documentation that shows a consistent income month after month.
Lenders require nonnegotiable documentation when you apply for a mortgage. This means you will need to provide a W-2, tax returns, pay stubs, and proof that you pay the down payment and any other required fees. If you are self-employed some of this documentation is hard to provide because you will not have W-2s or pay stubs.
High Down Payment
When you are self-employed you may be viewed as a higher risk on the risk assessment banks or credit unions use. This means you will be restricted to a certain loan amount and likely need a higher down payment. There are some cases where this down payment will need to be as high as 30%. You also may be required to have private mortgage insurance and a shorter loan term.
Everyone's financial situation is different and the requirements for their mortgage will also be specific to their circumstances. This is why it is important to be working with a great lender who comes highly recommended. Oftentimes your agent can set you up with their preferred lender who they have worked with before. Your lender will do their best to help you complete all necessary documentation that is needed due to your self. employment and help you with your pre-approval and loan process.
For more information on your home loan or to buy or sell a home in the Palm Desert area, or to speak to our loan officer about self-employed mortgages, contact us. We would be happy to assist you with any of your real estate investment needs.