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Qualifying for a Mortgage When You're Self-Employed

Due to the growing problems with the lending industry, the self employed and others who do not have a "typical job" could find themselves having a hard time getting the loan that they deserve and need from mortgage lenders.

Simply because of the varied income from year to year, high business expenses and the lack of a W-2, these small businesses (those employing 10 or fewer) can throw a red flag to lenders causing them to be considered a "risk".

Gene Fairbrother, of the National Association for the Self-Employed has stated that with so many of the more flexible loans going by the wayside it can be very difficult for the self-employed to get a home loan. He goes so far as to say "If a self-employed individual went to any kind of lender and tried to get a loan for a mortgage, you could have a great deal of difficulty finding a lender that would touch you."

There are a few things that you can do as a self-employed individual that can give you an advantage when applying for a loan.

Good Credit

Your FICO score is of the utmost importance. Ideally, it should be above 750, which is considered "high". Fairbrother recommends going so far as to check your credit report annually by contacting each of the three main credit bureaus, Experian, Equifax, and Trans Union to check for mistakes or bad reporting, which does happen quite often. If the reason that your credit score is lower than it should be is due to your own bad financial habits, then it is up to you to correct that immediately!

Since it is impossible to improve or "fix" your credit score in a short period of time (it can take 6 months or even as long as a year), it is imperative that you monitor it and keep making financial decisions that will positively affect this score.

Record Keeping

It is likely that when you are applying for a loan that you will be asked for not only your business tax returns, but also your personal ones, therefore you must keep excellent records.

Fairbrother offered this tip: If you are planning to take out a new loan in the next two-three years, then you should consider not taking as many deductions. This will increase your net income on paper and give you a better chance at being approved.

As a self employed individual, lenders now hold you to an even higher standard than most when it comes to proving your income, says Scott Kegan, executive director of the Nation Association of Mortgage Professionals. If your tax returns aren't enough and you must have the loan, ask your lender if an audited financial statement from a certified public accountant will help in proving your income. It may be worth the couple hundred dollars that you will have to pay for it.

The bottom line for the self-employed is to be responsible with your finances. Keeping good records and maintaining a high credit score, should be a daily routine and if it is, then you will likely be able to obtain the mortgage that you need for your home purchase.

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