They could be your nanny, the photographer at your friend’s wedding, your personal finance advisor or the developer that designed your favorite app on your smartphone. They are the self-employed. In fact, the Bureau of Labor Statistics reported this year that 14.4 million Americans are self-employed.
But when it comes time to getting a mortgage, being self-employed can be one of those hurdles that might feel like you can never win.
“It’s not that the self-employed borrower has to jump through any more hoops than someone that is employed by a company. But they have to have the right stuff and right documents,” says Suzanne Downs, president of the Palm Beach Mortgage Group in West Palm Beach, Fla.
She adds that just like the salaried employee, the self-employed person need a full two years of tax returns and must have been self-employed for two years.
According to the IRS, generally, you are self-employed if any of the following apply:
- You carry on a trade or business as a sole proprietor or an independent contractor.
- You are a member of a partnership that carries on a trade or business.
- You are otherwise in business for yourself (including a part-time business)
Mortgage lenders want to see Schedule C of the self-employed person. It is the form that reports income or loss from a business. If income increases between year one and year two, the lender averages the two. If the income for the second year is lower, the lender will use that lesser number instead of the higher one, Downs says.
If someone runs multiple companies, they will have to provide two years of tax returns for each of those companies in which they own 25 percent or more.
Also, since it is nearly autumn time now, the lender will also need to see a profit-loss statement for this year since the tax return was for the prior year. They just want to know what’s been happening this year, she says. If it was in the first quarter of the year, they wouldn’t need to see that statement.
With the self-employed, many use tax deductions and write offs from their income. They can write off everything from their office expenses such as ink and electronic equipment to a certain amount of rent and utilities depending on where they do their business. Sometimes, those write offs make their adjusted gross income look quite paltry compared to what they actually took in as income, Downs says.
“But it is the adjusted gross income is what we have to use to qualify them,” she said. “If you have a spouse or partner, and they are going to be on the loan application, too, then the joint income and assets will be looked at. If they have a $100,000 job and you are self-employed and only make $20,000, then the total income is $120,000. That will help in getting a mortgage.”
She adds that having a really high credit score might not help much in the end for getting a better loan if you don’t have the income or cash available for a down payment.
“You can do conventional lending with a 620 credit score, and FHA is down to 580.”
Her best advice is to get pre-approved for the loan especially with all the complications of being self-employed.
“Make sure you are in the right price range and see if you have the right lender that will work with you through it all,” she says.
Stephanie Gates, loan officer for Dijifi in Brea, Calif., says that some lenders work better with self-employed borrowers because they take the time.
For instance, her agency is smaller and wants to take the time to work one-on-one with clients that are self-employed. Approving a self-employed borrower takes more time and attention to detail than for most salaried borrowers.
“We have become good at going through the tax returns and seeing what depreciation and amortization that we can add back into the self-employed income to help their income grow,” she says. Those who take the time go the extra mile to see what can be added back. Certain little things you can add back.”
She says that big banks are so busy.
“They want it easy. They want the salaried employees with no overtime. They don’t have the time or don’t want to take the time for those who own a business,” she says.
The self-employed application can be a little complicated especially when someone has numerous businesses. If you have only one plus a Schedule C, it’s not that hard.
She recommends that someone who is self-employed to avoid online mortgage applications.
“You really need to do it over the phone or come into someone’s office,” she says.