Because you’re not employed by a traditional business, there’s some additional documentation required to qualify for a mortgage. It doesn’t have to be a hindrance; it just requires a little preparation.
One of the great draws of self-employment is the ability to strike out on your own and be your own boss. Taking responsibility for your own success can be very freeing.
It does, however make the process of verifying your employment a little different. What would normally require a phone call to your employer instead requires you to furnish a little bit of paperwork. The good news is you can provide any of the following as documentation:
- Current statement of bond insurance (policy must be at least two years old)
- A letter from your licensed CPA, enrolled agent or tax preparer
- Letters from clients indicating service has been performed
- A membership letter from a professional organization that can verify through your membership at least two years of self-employment.
- Any state license and business license that may be required in your profession
- Evidence of workers’ compensation and employer’s liability insurance
- A DBA (Doing Business As) issued at least two years ago
If you’re using a DBA for verification, you must prove current self-employment with two months of recent business account statements, creditor statements or company invoices.
Quicken Loans Mortgage Banker Dennis Spensley said one of the most important things a client can do to move the process along is to have income documentation ready at the beginning.
He went over what documents are needed if you’re a sole proprietor.
“When I am helping a self-employed client, I try to set the right expectation upfront,” Spensley said. “We’ll need two years of tax returns, both business and personal. We also typically need to have the client’s accountant prepare a (year-to-date) profit and loss and a balance sheet. If they have extended (their tax filing time) for the previous year, we’ll need a copy of the extension form and a profit and loss prepared for the previous year as well.”
If you’ve been self-employed for less than two years, it may be necessary to show additional documentation regarding the likelihood of continued income.
While the specific forms necessary are dependent on how you incorporate your business, in general, we’ll need personal tax returns (and, if it’s a corporation, W-2s) as well as a statement showing your portion of the business’s profit or loss. Profit and loss forms might include a Schedule C, Form 1120S or K-1, depending on your business structure.
It’s important to note that you generally can’t qualify if you show an income decline of greater than 25%.
Spensley also noted it’s helpful if you can separate your business assets from your personal assets.
“Self-employed clients typically have their business and personal assets intermingled,” he said. “If they can keep the funds that they will use for down payment and settlement fees isolated from their business assets in a personal savings account, that would work best.”
Depending on the type of loan, a minimum contribution to the down payment is required from your personal funds. Separating it from your business accounts will just make things easier.
Still have questions? Drop us a line in the comments section. Then get started on your home loan today!
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