Being self-employed and in control of your professional life is empowering. However, when it comes to borrowing money to purchase a personal residence, it can also put you at a disadvantage, if you are not properly prepared.
The main issues for self-employed mortgage applicants arise from proving income is sufficient and consistent enough to support a mortgage payment and supplying the “correct” version of income on the application.
When you are an employee, reporting your earned income is straightforward. You state your salary and bonuses and back up the amounts for verification purposes with W-2 forms and tax returns. The lender can easily call your employer as a final check.
When you work for yourself, you may have an accumulation of 1099s and invoices if you have a variety of clients or gigs. Some self-employed borrowers may own and run multiple businesses, which means the only way a lender can verify income is to pour through dense tax return schedules. It is a much messier and time-consuming process.
Even then, the income many self-employed individuals report on their tax returns may differ from their actual take-home pay. One of the advantages of being self-employed is taking more expenses as business deductions to minimize tax bills. This is great at tax time, but it can diminish your borrowing power.
When Income Isn’t Income
Some self-employed borrowers report gross receipts as income. However, this is business revenue. Income is found on line 38 of the federal tax return. It is a much lower number.
Working With You
While income qualification is essentially a standard requirement, it can help to work with a lender that has the flexibility to customize a mortgage to your circumstances. For instance, Old Second doesn’t package all of its mortgages for resale, the way many larger banks and online mortgage firms do. We hold a collection of mortgages for our own portfolio. This gives us the flexibility to customize more of our mortgages to our clients’ circumstances. We can take the time to understand your situation and even talk to your accountant to develop a more accurate assessment of your household’s cash flow.
What You Can Do
For some practical tips on how to improve your mortgage application’s appeal, click here for our infographic of suggestions. To learn more about how Old Second can help you qualify for a mortgage, give us a call at 1-877-866-0202 or start the application online at oldsecond.com.
Whether you are a serial entrepreneur or a member of the gig economy, knowing what to expect when applying for a mortgage and preparing accordingly can enable you to exercise more control over how lenders perceive and process your application.