Are you self-employed and find it difficult to get a mortgage? The process may appear quite lengthy for self-employed people, but there are direct ways of financing the purchase of houses other than obeying the standard income requirements. A no-tax-return mortgage is a perfect solution that helps self-employed people get a mortgage and prove their income in other ways.

What is a mortgage loan? Can self-employed apply for one?

A mortgage loan is a secured loan used primarily for purchasing real estate, where the property itself serves as collateral. This means that if the borrower fails to repay the loan, the lender has the right to foreclose on the property and sell it to recover the outstanding amount. Mortgages are commonly used by individuals to buy homes or by property owners to raise funds against their existing properties.

 

Self-employed individuals can indeed apply for a mortgage loan, but they may face additional scrutiny during the application process. Lenders typically require more documentation to verify income stability and repayment ability.

When Is It a Good Idea to Apply for a Mortgage If Self-Employed?

Finding the right time to obtain a mortgage is critical, especially among self-employed people. The best time to apply is when you have a stable or increasing income stream. As for traditional employees, they can count on the current wages per hour or year, but such freedom seekers will use stability or an increase in income, for example. Some lenders might wish to extend their income verification over two years, although some self-employed mortgage products offer shorter histories.

This should also be done when they have built a strong credit background and saved enough cash for a deposit on the mortgage. Independent workers are usually required to provide a down payment higher than that required by the conventional borrowers for any probable risks that might be associated with their employment status, so the more prepared financially you are before applying – the better your shot at getting a favorable loan underwriting decision would be.

The approval rate for self-employed mortgage applicants can vary widely based on several factors, including credit score, income stability, and the lender’s criteria. Generally, self-employed individuals face more scrutiny and may have a slightly lower approval rate compared to salaried employees due to the variability in their income and the additional documentation required. However, approximately 49% of self-employed individuals get their mortgage applications approved.

What are qualified and non-qualified loans?

Qualified and non-qualified loans refer to two categories of mortgage loans that differ primarily in their compliance with specific regulatory standards and the protections they offer to lenders and borrowers.

Qualified Mortgage Loan

A Qualified Mortgage (QM) is a type of conventional loan that adheres to the standards established by the Consumer Financial Protection Bureau (CFPB) to confirm that borrowers can repay their loans. These mortgages necessitate comprehensive documentation of income and assets, and the borrower’s debt-to-income ratio must be under 43%.

Non-QM Loan

A non-QM is a loan that doesn’t meet the Qualified Mortgage (QM) guidelines. These loans provide more flexible underwriting options for self-employed individuals, those seeking jumbo loans, borrowers with previous credit issues, and real estate investors.

How to Apply for a Mortgage as Self-Employed

Trying to obtain a mortgage when you are self-employed is different from trying to obtain a mortgage when you are an ordinary salaried employee. Submissions of standard documents used in the mortgage quotes, such as pay stubs and W-2 forms, which depend on fixed income, are a problem for independent workers such as freelancers, consultants, or businesspersons. Luckily, there is such a thing as a self-employed mortgage that follows more flexible helping documents such as the bank statement asset, among others, instead of tax returns.

If applying for such, one should approach lenders specializing in self-employed or no-tax-return mortgage deals since they will have relevant knowledge on what documentation to expect. Expect to offer proof of income other than tax returns, such as bank statements, profit and loss documents, and a record of having a continuous business with clients.

What documents are required for a self-employed mortgage application?

When applying for a mortgage without traditional tax return documentation, lenders may still ask for proof of consistent income and financial stability. Here’s what you might need:   

Employment Verification

Usually, self-employed candidates do not have employers to confirm their employment and stability of business, yet this essential part controls whether the applicant is going to manage a legal and stable business or not. This might include incorporating business registration documents, developing a corporate website or having contracts with clients. To show that you’re constantly seeking income-generating opportunities is the goal here.

Income Verification

  • Tax Returns: Personal and business tax returns for the last 2-3 years.
  • Profit and Loss Statements: Year-to-date profit and loss statements.
  • Bank Statements: Personal and business bank statements for the last 3-6 months.
  • 1099 Forms: If applicable, to show income from clients.

Business Documentation:

  • Business License: Proof of your business’s legitimacy.
  • CPA Letter: A letter from your Certified Public Accountant (CPA) verifying your self-employment status.
  • Client Contracts: Current contracts or letters from clients to demonstrate ongoing work.

Additional Financial Information:

  • Credit Report: A recent credit report to assess your creditworthiness.
  • Debt Information: Details of any outstanding debts or liabilities.

Selecting a Mortgage Provider for Self-Employed Individuals

Choosing the right mortgage loan provider is critical more so if you are a self-employed individual. No-tax-return or alternative documentation mortgages are not provided by all the lenders; thus, a borrower should search for lenders dealing with these products. Some smaller banks, credit unions, or mortgage brokers may provide certain programs especially to self-employed borrowers such as bank statement loans or asset-based lending.

As you choose your provider, you should focus on their expertise with freelance buyers, contractors, and self-employed borrowers, as well as their approach to papers. It also affects Loans, some providers may be flexible on credit scores, income verification methods, or down payment in order to qualify without using tax returns.

How to improve your chances of getting a mortgage when you’re self-employed

As a self-employed individual, there might be many hurdles on your way to owning a house. In certain situations apart from just filling the applications, you can increase your chances of getting a mortgage as an self-employed individual by adhering to the following points.  

Increase your credit score

Make sure that you are working to increase your credit score and ensure that your credit report is clean. This involves making all monthly bill payments in full, paying down your credit card balances and outstanding loans, fixing mistakes on your credit reports as well as not exceeding credit limits on your spread of credit cards.

Reduce your debt-to-income ratio

Another way to increase your shot at funding is to reduce your DTI to 43 percent or less. This can be achieved through not going for any more borrowings, reducing your current borrowings and repaying them earlier than agreed, and making more money.

Make a Larger Down Payment for Better Loan Terms

Using a considerably higher down payment than required is also helpful. “Minimum down payments for a bank statement loan ranged from 10 percent before the emergence of COVID-19. ‘But now, 20% or more are mandatory with most financial institutions,’ said the press release.

Find a co-signer or co-borrower

If you are self-employed and earn minimal income to secure a mortgage, having a co-signer or a co-borrower will help secure a mortgage or even a larger one. A co-signer or co-borrower enables you to use other people’s income and credit standing to apply for the loan.

Before proceeding, it must be understood that co-signers are not exactly the same as co-credit borrowers. You are not the only one who takes on that debt as your own spouses both in many cases do as well. Nevertheless, the co-borrower becomes a joint debtor on the title, while the co-signer does not.

Application Process for a Mortgage 

Once you’ve selected a lender, it’s time to prepare your application. Gathering the right documentation and understanding what’s required can make the process smoother.

Understand the Self-Employed Mortgage Requirements

Lenders may have specific requirements for self-employed borrowers, such as a minimum credit score, debt-to-income (DTI) ratio, or a history of self-employment. Understanding these requirements ahead of time can help you meet or exceed them, improving your chances of loan approval.

Compile Proof of Self-Employed Income

While you may not need tax returns, you’ll likely need to provide other forms of income verification. Compile at least a year’s worth of bank statements, client contracts, or other documents that show steady income. The more organized and complete your financial records are, the better your chances of approval.

Determine How Much of Your Self-Employed Income Qualifies

Not all of your income might be eligible for consideration. Lenders typically analyze average monthly deposits over the last 12 to 24 months to assess income stability. If your business experiences seasonal fluctuations, be prepared to explain any unusual variances in income and demonstrate how your business remains profitable over time.

 

In conclusion, securing a mortgage as a self-employed individual is challenging but entirely possible with the right approach and preparation. By understanding the unique requirements for self-employed borrowers, such as income and employment verification through alternative documentation like bank statements and profit-and-loss records, you can increase your chances of approval. Timing your application during a period of stable or increasing income and maintaining a strong credit background are key factors. Moreover, working with lenders who specialize in no-tax-return or alternative documentation mortgages ensures a smoother process. With proper planning, organization, and the right lender, you can achieve your homeownership goals despite the complexities of being self-employed. For personalized assistance and expert guidance, consider reaching out to The Accredited Group to help you achieve your homeownership dreams.