Helpful tips: Qualifying for a Mortgage when you’re self-employed.
At first glance, it seems as though the mortgage process is designed for traditional W-2 employees, and that the self-employed are simply left out in the cold. Well, the good news is that’s not the case; and with proper preparation and a little organization, self-employed people can secure a mortgage that is right for them.
If you’re self-employed, here are some tips on helping you prepare for the mortgage process:
- Look at your last two tax returns: This is how most lenders will calculate your monthly income. Monthly income will determine what you can afford. Lenders will ask for your tax returns from the past two years. They’ll look at your adjust gross income on each, add the two numbers and divide by 24. This will give them your average monthly income for the past two years. This is what the mortgage banker will base their decision on. If you want to get an idea of how large of a loan you will qualify for, add the numbers up yourself and figure out your monthly income before seeing your lender.
- Fill out all your paperwork: Prior 2008 financial crisis, you were able to supply bank statements to your mortgage lender in order to prove your business cash flow. But times are changed due to strict regulators and past fraud in the industry. Mortgage bankers will want to look at your tax forms, and they’ll need to collect this from the IRS directly in order to get proof of your income. You’ll need to fill out IRS form 4506-T which will allow the lender to get your tax records directly from the IRS.
- Manage your debt to Income ratio: Most lenders will allow you to borrow a certain percent of your income based on your debt to income ratio. When calculating this ratio, lenders will look at both front and back end debt. Front end debt is housing related, and shouldn’t exceed 28% and back end is your total recurring debt payments (including the front end). The less debt the better in every case which will result in smaller payments.
To get the largest mortgage possible, reduce or eliminate your debt payments, such as your car and student loans. This will improve your back-end ratio, which will help you qualify for a larger mortgage.
If you’re self-employed, using these tips will help you remain organized and focused on securing a mortgage. If you have any question, or are unsure of anything regarding a mortgage, talk to a trusted mortgage banker.
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