By Sabrina Karl
Self-employment numbers are on the rise in the U.S., making it an increasingly frequent question of whether you can qualify for a mortgage without a steady employee’s income. Fortunately, the answer for many self-employed applicants is yes, though documentation requirements can certainly be a bit more work.
Rates can also be higher for self-employed applicants, but it’s not always the case. Many factors play a role here, and the good news is that several are within your own control.
The logic behind lenders being a bit more picky on this front is that they consider self-employment income to be less reliable than employed, W-2 income. However, a self-employed applicant who has run her own business profitably for several years will be looked upon differently than one who just started working for herself within the past year.
For those who have a co-borrower with steady W-2 income, the rate you’re offered may not be affected, and your odds of being approved are significantly enhanced. However, you won’t escape the extra paperwork requirements.
Unless, that is, you opt for a no- or low-documentation loan, which some lenders offer for those with hard-to-document income. As you might predict, however, these lower-paperwork loans come at a price, in the form of a higher mortgage interest rate.
That’s why it’s best for your bottom line if you can collect all the paperwork your lender requires, which will almost certainly include 1-2 prior years’ tax returns, and likely also a profit & loss statement for your business and recent business bank statements.
What isn’t different for self-employed applicants is that the conventional mortgage wisdom still applies: shop around for the best offer, and boost your approval odds and lower your rate by increasing your credit score, reducing debt, and considering a larger down payment.