Getting a Mortgage When You Are Self Employed

Getting a mortgage when you are self employed brings extra challenges to the borrower. The amount of documentation and paperwork requested may seem excessive. All the paperwork is intended to verify that you can operate a business, cover expenses, and still make an acceptable enough profit to pay personal debts. When you are self employed, you get paid last and everyone else gets paid first.

Mortgage Tips

The first and best practice self employed individuals can implement is not to co-mingle funds or debts. Business credit cards often appear on personal credit reports, which may be unavoidable.   To help avoid this, make certain that the card is used only for business purposes and only paid by the business.  This simplifies things for IRS and mortgage reasons, and thus simplifies the world. Also, with proof of 12 payments from the business, personal debt on the credit report is not considered in the debt ratio as the business is actually the one paying.

Second, keep good records.  You will be required to verify the last two years income plus a year to date income report. Invest in an accounting program and this sort of financial report will be very easy to do.  The accounting programs today follow a checkbook lay out. If you can work a checkbook, you can learn to work a business accounting program. Be ready for lots of questions and verifications as to whose debt is whose, the borrower or the business.

If there are onetime expenses, whether an unanticipated cost or large capital investment, be sure to break these out from general expenses on your taxes. It does not change the tax liability at all, but it clearly shows to an underwriter that it was an isolated expense/investment. Since it is not an operating cost, it is not held against the income of the business. Repeat costs, operating expenses, and recurring capital improvements are what matters when determining the income generated from the business.

Some expenses are paper costs only, such as depreciation, business use of home, amortization, and depletion.  The self employed borrower should maximize these expenses when filing tax returns for the maximum extent possible.

Be ready to prove and document when you enter the process.  With some patience and persistence, credit worthy self employed borrowers, no matter how complicated their situation, do finally close. For those self employed, the only documentation used to prove income today are federal tax returns.  If you did not claim, you did not make it.

What other tips do you have for getting a mortgage when you are self employed?