As of June 25, 2018, we’ve made some changes to the way our mortgage approvals work. You can read more about our Power Buyer ProcessTM.
Like any huge life decision, buying a home requires a lot of thought and a certain amount of paperwork.
If you work for a company and receive pay stubs or direct deposit notices, those, along with months of bank statements and other relevant proof of income all form an easily documented baseline to get started.
Qualifying for a mortgage can be uncomplicated, especially if you have proof of consistent income and a respectable credit rating. If you work for yourself, providing accurate and relevant documentation requires a little extra legwork. In the home buying process, the goal is to close the loan as quickly as possible and with minimum heartburn for both lender and borrower. Freelancers and the self-employed have to do some digging before providing proper documents to support their loan worthiness.
Accountants and real estate experts agree that the most common benchmark for submitting loan documents is a two-year window of proven income. In addition to steady income, the U.S. Bureau of Labor Statistics suggests that a satisfactory credit rating and a sufficient down payment (depending on the lender’s guidelines) are the Big Three when it comes to making your case for a mortgage.
The agency also suggests that before doing anything, the self-employed/freelancers need to have an established tax identification number. For those employed in conventional means, pay stubs provide acceptable proof of income. For folks like hairdressers, bartenders, entrepreneurs and most telecommuters, tax returns are what works best, typically two years’ worth. Potential borrowers should also be prepared to provide documentation of their business. If you’re an established freelancer or entrepreneur, you’ve already submitted your W-9 and Schedule C form (used to report profits/losses and to list business-related tax deduction). If you’re an aspiring self-employed individual, these first steps are crucial.
Freelancers and small business owners should be paying their income taxes on a quarterly basis. First, this establishes a paper trail of proof of income. Secondly, paying quarterly reduces the end-of-year sticker shock when the IRS tells you it’s time to pony up. Chronicling your income – all of it – not only serves as documented proof, but could help with loan approval down the road.
Robin Steranko is a Ferndale, MI-based certified public accountant. She says the self-employed should be mindful of the little things that can either add up or sneak up.
“It’s simple, but they really just need to do it,” she said. “In addition to proof of income, they will need a financial statement that details where their business is currently at, in terms of income and expenses.
“Also, what happens is not everyone reports all of their income. The outcome of their loan is tied to how much income they report. For those who don’t report it all, they are surprised at the end when the loan is rejected.
She also mentioned that somewhere down the line, accessibility to Social Security funds could be limited or nonexistent if income goes unreported.
Much of this can be easily avoided. Steranko said she keeps on top of her own accounting by using software programs.
“It’s easy and inexpensive,” she said. She also added that freelancers can position themselves nicely before the loan process by having their records kept thoroughly and up to date.
“When it comes to the loan process, lenders want documents now,” she said. “They don’t want to wait for them.”
Another suggestion is to keep a separate bank account, so income and expenses come from the same place. Months’ worth of bank statements go a long way in the income verification process.
Yes, all of this can be complicated. Thankfully, there are resources available to help navigate the financial documentation terrain. There is no more authoritative source than the Internal Revenue Service, who encourages freelancers to keep receipts, sales slips, canceled checks, invoices and anything else that can “substantiate items of income, deductions and credits.” IRS spokesperson Eric Smith reinforced that proper and updated bookkeeping provides myriad benefits during the lending process.
“It’s really in your best interest to keep good records, so you can get the deductions that apply and accurately verify income source,” Smith said.
We have other tips on how to apply for a mortgage when you’re self-employed; if you have any questions, please let us know in the comments!
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