Qualifying for a Mortgage when Self-Employed

Self-employed and others without typical, W-2 incomes could find themselves having a hard time getting a home loan due to heavier regulations.

Because income can vary from year to year, business expenses are high, and there is no W-2, small businesses and the self-employed may be seen as a high risk to lenders.

Gene Fairbrother, of the National Association for the Self-Employed states that with the variety flexible loans being eliminated, it can be difficult for the self-employed to get a mortgage. 

He also states that "if a self-employed individual went to any kind of lender and tried to get a loan for a mortgage, [they] could have a great deal of difficulty finding a lender that would touch [them]."

However, there are things that you can do to give you an advantage when applying for a home loan.

Fight for Good Credit

Your FICO score is critical. Ideally, it should be above 750. Fairbrother recommends you check your credit report annually by contacting the three main credit bureaus: Experian, Equifax, and Trans Union. 

If you find that your credit score is lower than it should be is due to your own bad financial choices, it's up to you to correct it immediately!

Since it is impossible to improve or "fix" your credit score quickly (it can take 6 months or more!), it is important that you monitor it and make smart financial decisions.

Maintain Clear Record Keeping

When applying for a loan, it's likely that you will be asked for your business tax returns as well as your personal taxes. 

Fairbrother offers this advice: If you plan on to taking out a home loan within the next two-three years, then consider not counting many deductions. This increases your net income and gives you a better chance at being approved for your home loan.

As a self employed person,  lenders hold you to even higher standard when it comes to proving your income, states Scott Kegan, executive director of the Nation Association of Mortgage Professionals. 

If your tax returns aren't sufficient, ask your lender if an audited financial statement from a certified public accountant will be enough to show proof of income. It may be worth the added expense!

The bottom line is to be responsible with your finances. Keep excellent records and maintain a high credit score and it will be possible to obtain the mortgage.

Gretchen Wegrich

Gretchen Wegrich is an editor at Lender411. She specializes in mortgage basics, personal finance and green living. She graduated with a bachelor's degree in writing from University of California, San Diego and previously worked at the Santa Cruz Sentinel. Contact her at gretchen@lender411com.