Self Employment
What Are The Special Mortgage Challenges for Self Employed Borrowers?BasicsMortgage lenders classify borrowers in two different ways:
Wage earners are easier to analyze for a mortgage lender. They typically can provide employment documentation, pay stubs, and tax returns. Their income source is easier for a mortgage lender to understand. A self-employed borrower is often more difficult to understand for a mortgage lender. Challenges may include:
Stability Of EarningsThe first issue is stability of earnings. A self-employed borrower may not have steady income. Earnings will often rise and fall depending on how their business is going. Track Record In BusinessLenders usually like to see a self-employed borrower have at least a 2 year track record in their business. This usually shows the lender that the person is capable of generating income in their work. They usually also like to see someone who is self-employed in their previous line of work. If you have years of experience as a carpenter but open up a coffee shop this is a major switch and a mortgage lender will have to analyze this. Complex Tax RecordsSelf-employed borrowers often have complex tax returns. This is partly the result of a difficult tax code and partly because most self-employed borrowers are thorough in using all available tax deductions. Unclear AssetsThe final issue is unclear assets. Borrower assets may be intermingled in business accounts with other business partners. Deposits in a business bank account may represent revenue but not necessarily the final income or net profit a business generates. Additional StepsMake sure that when you apply for a mortgage you clearly state that you are self-employed. The self-employed have virtually all the same loan options as wage earners. You should prepare your documentation in advance - such as making copies of permits, business licenses, and financial records.
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