Self-employment income can be the nail in the coffin when applying for a mortgage if you are not careful. The good news is that there are plenty of programs out there that allow you to use this type of income and get favorable terms. Not every self-employed person is considered high risk, but there are definitely certain ways to make your income from self-employment look as favorable as possible.
Determine your Write-Offs
As a general rule, your bottom line income on your tax returns is what the lender has to use to qualify you for a loan, but there are exceptions! If you write off certain items, you might be able to add them back into your qualifying income to lower your debt ratio and increase your chances of getting approved for a mortgage. These write-offs include:
- Mileage – Some lenders will add back a certain percentage of your mileage write-offs into your income. If you are close to qualifying, this little add-on might be just what you need to get your debt ratio in order
- Depreciation – Almost every mortgage program enables you to add depreciation back into your income, which is good news for most business owners as a majority of them use the depreciation write-off on their taxes on equipment and even computers
Have a Large Down Payment
Lenders look for compensating factors especially when you are self-employed. One of the best ones to use when purchasing a home is to put down a large down payment. Obviously, the higher the amount of money you put down, the better off your chances of getting approved. There is no number that notates the absolute minimum; basically, the larger the down payment the better your chances of getting approved because it shows that you have more “skin in the game.” This means that you have more invested in the home and are more likely to find a way to make your payments. In addition, the down payment should come strictly from your own funds, rather than gift funds from others. You are much less likely to work hard to keep your home if someone else’s funds are invested in your home.
Show Expense Repayment
Are some of your expenses repaid by your company? You can show this to the lender with proper proof in order to get the expenses added back to your income. You will have to have adequate proof of the repayment, such as canceled checks that are written from your company to you in the exact amount of the expenses. The lender will require proof that your company paid you the money, as well as that you received it in your personal account. This only works if you use one or the other bank account for qualifying purposes, though. If you use both business assets and personal assets, there could be too many opportunities to cross the line and “double dip” with your assets as it is hard to differentiate between the two when you are a business owner.
Self-employment income is not a deal breaker for a mortgage; it just means you have to get a little more creative in order to get the approval that you need. If you write off a large number of expenses, talk to your lender about which write-offs you take to determine what they are willing to add back in. Also, make sure to make as large of a down payment as possible. The more money you put down, the more willing a lender will be to talk to you – it is all about coming up with those compensating factors that make up for the high level of risk that your self-employment income provides a lender.