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Getting a Mortgage with Self-Employment Income

by Ryan Guina

My wife and I recently bought a new home and it was more of an adventure than I anticipated it would be. And when I say adventure, I really mean hassle. Part of the reason is that my income comes from various sources, and even though most of it is in the form of a standard paycheck, my lender wanted to see proof of everything I earn, my past tax returns (personal and business), proof of assets, and more. It was much more than I anticipated and it took 3 weeks longer than the initial time estimate.

Tips for getting a mortgage while self-employed

self-employed mortgage application

Applying for a mortgage while self-employed?

In response to the mortgage crisis and its after-effects, mortgage lenders have made many changes in the last few years. Unfortunately, many of those changes make it more difficult for those who rely on self-employed income to get a mortgage. Our self-employment income plays a large role in our personal finances and it was imperative we list our self-employment income in our mortgage application. The following tips are based on my personal experience of getting a mortgage approval:

Pay yourself a real salary – and beef it up if you can. There are many ways to pay yourself as a business owner. For example, my business is taxed as an S-Corp, which means I pay myself a “reasonable salary” in the eyes of the IRS, and I can take the rest of the income as dividends. The difference is that my salary is taxed as self-employment income and the remainder of my income is taken in the form of dividends, which are taxed at my personal income rate (business dividends in this instance are different from investment dividends which are taxed at 15%). This allows me to legally reduce my taxable income and save money on taxes. But if you are planning on applying for a mortgage it is important to show yourself taking a salary, and the bigger your salary, the more proof of income you can show your lender (your salary will be reflected on your W-2). Reducing the number of deductions you take may also help you establish a larger income in the eyes of the lender. I recommend speaking with a tax professional if you are in this situation because paying yourself a larger salary and/or taking fewer deductions will increase your taxable income in your current tax year. But it also may make it more likely to be approved for a mortgage.

Keep excellent financial records. Make sure your financial records are in excellent order before applying for a mortgage. My lender wanted to see my personal and business tax returns for 2008, 2009, and 2010. I hadn’t filed my 2010 tax return by the time I applied for my mortgage (in mid February), so my lender wanted a copy of a Profit and Loss statement from my CPA – during the busiest tome of the year for accountants. Thankfully I was able to find a CPA and get my documents to him with enough time to prepare them. Even with a quick turnaround from my accountant this delayed my application a few days. A great way to keep track of your business finances is with QuickBooks or another accounting program. [See how I manage my business income for more tips].

Make sure you have plenty of time. As I mentioned in the opening paragraph, it took 3 weeks longer than the initial time estimate my lender quoted me.  I sent in the required paperwork, which lead to more questions and requests for more paperwork. Personally, I think the lender could have done a better job of this by having a script for these situations – a process they follow each time. It would be easy for them to set up and would likely save them and their borrowers thousands of man hours and wasted rework each year. We also bought our home in the beginning of spring, which is a time of year when applications rise. I spoke with a representative at our lending bank who mentioned they went from processing an average of 400 mortgage applications to over 3,000 almost overnight, which further delayed our process. Thankfully, we built a buffer into our schedule and it didn’t affect us too much, other than adding frustration to the process.

More mortgage application tips:

These apply to everyone applying for a mortgage, but may receive added attention if you are self-employed or rely on irregular income:

Improve your credit score: Your credit score is very important for your mortgage, especially the FICO 8 score, which is a credit score specifically designed for mortgage lenders. Work on improving your credit score in the months before you make your application. Also note that being approved for a mortgage can increase your credit score over time, as long as you make regular payments.

Make a large down payment: Lenders are more willing to make a loan when they know the borrower has more skin in the game. My wife and I used a VA Loan for our mortgage because it had lower mortgage rates at the time of our application. Even though VA Loans don’t require any down payment, we put down over 20%. You should always shoot for a minimum down payment of 20% or more so you can avoid private mortgage insurance (again, we did this even though VA Loans don’t require PMI).

Have cash or other investment reserves: Our lender wanted us to prove our liquid assets before approving us for a loan. Self-employment income is generally viewed by lenders as riskier than a traditional salaried position, and our lender wanted to know we had assets in the bank in the event our self-employment income was reduced.

Search for the best mortgage rates. You should always shop around for the best mortgage rates before applying for your mortgage. I visited several websites, made a few phone calls and received multiple quotes before selecting my lender. You can get free mortgage rate quotes, from several financial institutions to shop for the best rates. Several financial institutions offered comparable rates, and I recommend you use the institution which offers the best all around offer based on your situation.

Meet with a lender that has a local presence: My bank is a large financial institution, but they don’t have a local presence where I live. If I had to do it again, I would consider going with a local bank where I could meet with them in person. It is much easier to establish a relationship when dealing with someone in person and I think it would have shaved a couple weeks off the process as much of the wasted time was spent in sending documents back and forth and waiting for them to review the documents I sent. Having a personal contact would have sped up the process considerably.

Do you have any experiences with getting a mortgage while self-employed or while relying upon irregular income?

photo credit: nikcname.


Published or updated January 6, 2012.
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{ 10 comments… read them below or add one }

1 Mike Holman

What a royal pain!

I certainly understand why lenders want to investigate self-employment more than regular employment – but that doesn’t make it any easier for borrowers like you.

Good motivation to get that mortgage paid off before you move again (if you ever do). :)

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2 Ryan

Getting the mortgage paid off isn’t the issue – it’s getting the mortgage in the first place! Selling our old house was enough to pay off our old mortgage, then we rented for a few month while we searched for and found our current home. It was getting the new mortgage that was such a hassle. Hopefully it won’t be so difficult if ther eis a next time (but I’m not planning on that for a long time!).

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3 Ronil

We refinanced last year In August and had put down about 8.5% down and took the loan out for the rest .As of today, we have paid down 1% additional in our principal balance. We had to sign up for a PMI for minimum of 2 years and maximum of 10 years. I want to think of ways to pay down more prinicipal to reach the amount sooner so that we don’t have to PMI. Currently I can afford to pay $100 extra for the next 64 months, which will bring us to the balance of 20% assuming we at least get the same appraisal value when we believe we have paid of 20%. This will save us 11 months of PMI, the overall loan will be reduced by 9 months and I would have saved about $2068 in PMI. My question is as follows.

Currently I am putting in 13% before taxes in company’s 401K. The company matches up to 6%. Should I lower my 401K contribution to pay for the prinicpal quicker so that I can get away from PMI. PMI is about $188 per month. I only have about $15K in my 401K and almost turning 30. I do not have any other source of income besides my current job.

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4 Ryan

Ronil, there are a lot of ways to answer the question, but only you can decide which situation is best for your needs. If I were in this situation I would consider how much the additional cash flow that eliminating PMI would affect my life. For example, if you have other sources of debt, then the extra $188 per month would free up more cash flow to pay off the other debt or give you more to invest each month. At the minimum I would invest to get the 6% company match in your 401k, then look at the rest of my financial situation and run some numbers to see which scenario comes out the best in the long run.

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5 Hunter

I appreciate the difficulty of getting a mortgage approved while self employed.

In my previous lif as a mortgage loan officer, I used a product called NINA. This stands for No Income, No Assets. It’s basically an loan that is approved on the credit score of the applicant, and the strucure of the loan, with no further lender questions asked.

I’m not sure if such a product is still available, but for the right applicant it made the process very efficient.

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6 Ryan

Wow… that sounds like a lot of what got lenders in trouble during the mortgage bubble! My process was much more detailed, probably as a result of the mortgage crisis, and also because I went with a VA Loan, which often has more stringent requirements than many conventional loans.

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7 B Kelly

i find that having some time deposit aside help in the mortgage application as well. better yet, if that is not part of your calculations towards the downpayment of the property you inted to purchase

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8 Ron

Hi Ryan

First let me say that you covered most of the important points, I am a mortgage broker in Canada so I thought you might like to know some of the differences regarding self employed mortgages.

Most Canadian lenders want proof of income for the past 3 years and they will only accept a “notice of assessment” which is part of the Canadian gov’t tax return. This cis very difficult to fake.

Most lenders do not believe any statements from accountants, bookkeepers, etc, they are easy to fake. As you stated the best way to get a mortgage if you are self employed is to put down a large down payment, you will then get lower interest rates and better terms.

I am presently arranging some deals for Americans that are buying property in Canada, they are putting down about 50%. No lender will finance the deal with a lower amount since the owner will be living in the US.

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9 Paul Californian

Its insane !!!

I am buying a home with $500k down payment. seeking a jumbo loan of $870.

Credit scores are in the 790 range. Earnings are 300K + for last 4 years. Been in my job for 10 years. in industry for 25.

They want proof of everything. 3 years of W2 statements and IRS tax returns. Divorce decree. Asset distribution from divorce. 24 months of cancelled rent checks. explanation on ANY deposit in account for last 90 days that is not a paycheck. — I can handle all that BUT the real rub is that I am a 30 % shareholder in my business and CEO . So now they want 3 years of company returns. explanation on how and when I get paid, and audited P&L and balance sheet. We are not required to get audited accounts per the IRS rules as we are a tightly held company. But that’s not good enough for the banks. So now I have to spend $4k to get an audit and 2 more weeks – probably going to loose the house as a result.

What ever happened to CEO accountability?? I can sign – I am liable for telling the truth. Sarbanes Oxley insures all that now. But its STILL not good enough for the insane idiots at the bank wanting to wield their power to deny loans. At times I just wonder where logic and good business sense went. Oh, I know – its the idiot traders at JP Morgan et al. that gamble with our hard earned money and create the financial crisis that we all pay for.

Rant on

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10 Michelle

I really, REALLY appreciated reading this post right now. We plan on buying in around 1.5 years, but we are preparing now since we are both self-employed. Honestly, I’m a little scared of the hassle. Our first house was extremely easy since we both has day jobs. We literally were pre-approved and had the keys to our house all within 2 weeks.

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