What do Lenders Look for in Self-Employment Income?

You need income to qualify for a mortgage unless you are a self-proclaimed millionaire that can live off your savings. Luckily, lenders allow a large variety of different types of income to get a mortgage. You don’t need a 9 to 5 salaried position to get approved.

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You can even own your own business and get a mortgage, contrary to what many people believe. Lenders just need to be able to confirm beyond a reasonable doubt that you make what you state that you make. Without paystubs and W-2s, lenders will need to use alternative ways to verify your self-employment income.

Keep reading to learn what you must provide in order to qualify for a mortgage as a self-employed person.

Employment History

First, lenders are going to look at your employment history. This means more than just your self-employment history. What they want to see in your past is some type of experience that will help you be successful as a self-employed borrower.

This experience can come in several forms:

  • You previously held a job in the same industry as your business. This will give you the experience in the industry that may be necessary to succeed in your own business.
  • You recently went to school or had some type of training to help you be successful in your business. This is crucial if you don’t have prior work experience in the industry.
  • You have a college degree in the industry that you have a business. If you went to school for finance and you opened a business as a financial advisor, lenders will believe that you have what it takes to succeed.

This history will play a major role in your ability to secure a mortgage. Lenders need to know that your income will continue for the foreseeable future. Without proof that you know what it takes to succeed, this may not be the case.

Proving Your Self-Employment Income

If a lender decides that you might be a good risk, you’ll need to prove your self-employment income. This process will be a little more detailed than it would if you worked for someone else. Lenders need to make sure that your income is legitimate and has the ability to continue.

In order to confirm the past receipt of your self-employment income, lenders will ask for your last two years of tax returns. This will definitely include your personal tax returns, but they may also ask for your business tax returns as well. In addition, lenders will ask for a current year-to-date Profit & Loss statement.

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These statements will show a lender how much money you make. Keep in mind that they will look at the adjusted gross income. This is different from those borrowers that work for someone else. Lenders typically use gross monthly income to determine the debt ratio for these borrowers. Because you own your own business, though, lenders need to take into account the expenses you incur as a business owner, which is why they use the adjusted gross income future.

Lenders typically take a 2-year average of your self-employment income. This allows them to account for the peaks and valleys that your income likely experiences as a self-employed borrower. They will then compare this average to your YTD Profit & Loss to make sure that you are on track to make the same amount of money.

Dealing With a Short Self-Employment History

If you have been self-employed for less than 2 years, you may have to shop around a little bit for a lender. Certain lenders will allow a shorter history, but they typically have one requirement – you must have some type of experience in the field, like we spoke about earlier.

Let’s say for example that you were a teacher but now you own your own restaurant. You’ve only owned the restaurant for 7 months. There aren’t too many lenders that would go ahead and give you a loan because you don’t have the experience in the restaurant industry. The lender has no idea if you will succeed as a restaurant owner or not.

On the other hand, if you worked in the restaurant industry for 10 years and then you decided to open your own restaurant, the story changes. Lenders might be willing to give you a loan after only owning your restaurant for a short while based on your prior experience and knowledge.

The bottom line is that lenders look for the same thing in self-employment income that they look for in standard income. They want consistency and reliability. The way that they verify your income will differ, but in the end it’s all the same. Lenders want to make sure that you can make your mortgage payments as well as your other monthly obligations without a doubt. If you can prove that, you’ll be in good shape to get your mortgage.

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