Can self-employed people get mortgages? The short answer is yes. The long answer is that self-employed people can get mortgages, but they may hit a few extra roadblocks compared to employees.
Here are a few things to keep in mind as a self-employed person applying for a mortgage.
A Mortgage for Self Employed Has the Same Process as Everyone Else
Your overall process of getting a mortgage is the same as someone who is an employee. The lender looks at the same metrics, the same paperwork is filed, etc.
That means what is important for everyone else to get a mortgage is also important for you:
- Steady, reliant income
- A high enough income
- Good credit
- A good debt to income ratio
Let’s quickly talk about each of these things.
Self Employed and Income for a Mortgage
When an underwriter for a mortgage looks at a self-employed person’s income, they start with taxable income. Then they add back in deductions that have been taken, such as depreciation and deductions.
It’s also common for them to subtract “windfall” income, such as a big sale that is abnormal. Or they might add back in a number for expenses that aren’t recurring.
Their ultimate goal is to get an idea of how much you regularly make in your business. Outliers such as a windfall of cash or a big, abnormal expense can throw off the overall numbers, so they take action to correct them.
Keep in mind that just like an employee, the amount of time you’ve been making this money as a business owner is also important. Who do you think the lender is more likely to offer a mortgage to- someone who just went into business 3 months ago? Or someone who has been operating a profitable business for 10 years?
That long history is important because it helps give them confidence that you know what you’re doing. They usually look for a minimum of 2 years of self-employment, but every lender is different.
Other Self Employed Mortgage Factors
As referenced earlier, you’ll still need to look good on paper for other factors as well.
Credit Score – if your credit score is less than 670, it will be harder to get a great interest rate and terms on your mortgage. While other things like a high income or debt to income ratio can help make up for this, you may still have difficulty. That’s because your credit score essentially shows lenders if you’re good at paying your debts.
Debt to Income Ratio – another important ratio in the mortgage industry, this shows how much money you make vs. spend on debts on a monthly basis. This can be tricky for self-employed people, as this is where separating your business from personal expenses becomes very important. If your business debts are in your name, it will make this ratio look worse.
Can self-employed people get a mortgage? Definitely – you may face different hurdles than an employee, but it’s definitely possible. To get started, call us at 949-392-6400 and we can answer any other questions you have.