Qualify For a Mortgage When Self Employed

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So you want to know if you can qualify for a mortgage loan when self employed? Being self-employed comes with many rewards and benefits. You can set your own schedule.  You can decide what customers you want to work with and there are substantial tax write-offs. The tax write-offs such as business use of home, utilities, advertising, and transportation expenses, just to name a few, are enough so that you can offset a large portion of your income. More so than if you are working as a W2 employee. A W2 employee receives a paycheck periodically, whether it is weekly, biweekly, twice per month, or once per month.

A W2 employee receives paychecks and has paycheck stubs and can document how much income they earn.  This is because they receive a statement of income at the end of each year showing how much money they have earned.  As a W2 employee, this is great when you are applying for financing to buy a home. If you have the right documentation you can qualify for a mortgage loan when self employed.

Proof of Income Needed to Qualify for a Home Loan

When you buy a home, you need to show stable income. That is, two years of income to be exact. As a W2 employee, this is simple as you would provide your lender with a copy of your last two W2s. You would also provide the last two years of tax returns. When you are self-employed, proving your income is not as simple. When you are self-employed, qualifying for a mortgage based on income is a little more challenging. You need to provide two years of W2s and the last two years of tax returns. What is the obstacle here. Well, for starters, when you are self-employed, those tax deductions that were so beneficial in reducing your taxable income, may come back to haunt you.

Debt-to-income Ratio used When Self-Employed

Remember all of those deductions you took for business use of your home, advertising, transportation expenses, and utilities, just to name a few? Well, those deductions make your income smaller. This could hurt your debt-to income ratio. What is debt-to-income ratio? Your debt-to-income ration is the percentage of your gross monthly income that is used to pay your monthly expenses. A high debt-to-income ration tells a lender that you may have trouble meeting your monthly financial obligations.

How Much Can I Borrow if I am Self-Employed?

Qualifying for a mortgage when you are self-employed is a challenge when you have a high debt-to-income ratio. When you are self-employed your debt-to-income ratio is calculated by taking your gross monthly income and subtracting out all business deductions as shown. All deductions as shown on Schedule 2106 of our federal income tax return are deducted. Deductions, for depreciation and amortization, or any other deductions that do not result in actual cash expenses, are added back in for your benefit.  This calculation will help ensure that you can qualify for a mortgage loan when self employed

A point to remember is that when qualifying for a mortgage when you are self-employed, the bank will look at your gross receipts.  This is actual sales, minus all of your deductions claimed on your tax returns, except for depreciation and amortization. A bank will not accept stated-income when qualifying for a mortgage loan when you are self-employed. If you have the right documentation you can qualify for a mortgage loan when you are self employed.

About the Author: Arlene Disessa is a senior writer for California Loans with Gustan Cho Associates in the Greater Sacramento, California area, including Placer County, and the cities of Rocklin, Roseville, Granite Bay, El Dorado Hills, and Auburn.  Call Us today at 530.813.0661 or email at adisessa@rhloans.com.  Arlene Disessa is available 7 days a week to answer your questions.  Do you have bad credit? Call Us today on ways you can improve your credit score and qualify for a mortgage loan. For more useful information visit http://www.california-loans.com

https://www.hud.gov/program_offices/housing/sfh/handbook_4000-1

 

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