Applying for a mortgage is a stressful process for everyone. However, it can be especially stressful if you're self-employed. Many people who are self-employed have trouble proving that they have a consistent income that's high enough to cover mortgage payments and other living expenses. What's more, lenders tend to require more from self-employed folks because they see them as a greater risk than applicants with salaried jobs. But that doesn't mean you can't get approved. You just have to do a few things to improve your chances of getting approved for a mortgage.
Lenders are looking for stable and consistent incomes, which can be difficult to show when you're self-employed and experiencing the feat-and-famine cycle. To stay more stable, try to look for more long-term contracts that will provide you with consistent income. Also, avoid taking long breaks during the years prior to your mortgage application. While it's nice to be able to take a month off when you want to, this will worry lenders.
The goal of every self-employed worker is to pay as little in taxes as possible. One way you can pay less taxes is by taking all of the deductions that you can. In some industries, deductions may cancel out a large portion or all of your income, leaving you with no income to woo lenders with. During the years prior to your application, don't take all of your deductions. Lenders typically want to see two years' worth of returns.
You will greatly improve your odds of being approved if you have money put aside for future mortgage payments in the event that you fall behind. While there's no magic number of payments to have in the bank, the more money that you have tucked away, the better.
You may have to provide more documents than a standard W-2 worker does. Be sure to keep business records using an approved bookkeeping system or bookkeeping software. A lot of software will even help you print profit-and-loss statements, which may be required. Also, it's a good idea to keep your personal and business accounts separate. You want to show how much money you've paid to yourself and how much has gone back into the business.
As you can see, getting a mortgage when you're self-employed can be more stressful and more involved because more is expected of you than a traditional employee. However, you can get approved if you take the extra time and make a little extra effort to show lenders that you're a good bet.
Talk to a professional such as Chris Calhoon Real Estate for more advice.