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If you had a more typical job—one with cubicles and dress socks—it would be much easier to prove your income and employment during the mortgage process. But when you own a small business, getting a home loan can be tricky.
Let’s take a look at the documentation needed to get a mortgage when you’re self-employed. With the right preparation, you can own your own business and your own home.
For traditional careers, a verification of employment can be done with a 5 minute phone call. A mortgage lender will call up your employer and ask if you’re still working there, and if you are, you’re good to go.
But if you’re self-employed, you’re obviously your own boss, which makes what you say about your employment a bit more difficult to verify. Instead, you’ll need to show some paperwork to prove that you actually do the job listed on your business cards.
Take a look at the paperwork you can submit to verify your employment:
Most lenders are looking for documentation proving that you’ve been self-employed for at least 2 years. It lets them see that this is a real business and not just a half-baked phase you’re going through. If your small business is less than 2 years old, it’s going to be much more difficult to get a mortgage, but it’s still possible. You might need to show additional documentation to show that your business has the legs to continue to exist (and produce income).
Remember: Preparation is key when applying for a home loan. And the purpose of submitting this documentation is to build your case, showing that your small business will stand the test of time.
Along with your verification of employment, you’ll need more than your word alone to prove your income when you’re self-employed. With the help of proper tax documentation and well-managed bookkeeping, you’ll need to provide the following information when applying for a mortgage:
It’s also important to note that, in most cases, you won’t be able to qualify if your income shows a decline of greater that 25% year over year.
Dana Staniec, director of mortgage banking at Quicken Loans, also explains that only certain income will qualify when applying for a home loan:
“The income we use to qualify is what’s taxable with the IRS, not gross revenue or receipts,” says Staniec. “And there are also restrictions on using funds from a business account with certain mortgage products.” To learn more about this specific process, start by speaking with a Home Loan Expert. They’ll be able to look at your specific situation and make the proper recommendation.
When applying for a mortgage, you’ll also need to provide proof of assets. In many cases, small business owners intermingle their personal and business assets, which can cause issues when they’re applying for a mortgage.
Quicken Loans Home Loan Expert Dennis Spensley explains that, for small business owners, “keeping the funds that they’ll use for a down payment and settlement fees isolated from their business assets in a personal savings account works 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.”
And if you’re planning on using assets from your business account to close, keep receipts and clear records showing your larger deposits entering that account. Depending on the mortgage product, closing costs can add up fast, so be sure to budget accordingly for these expenses.
Before applying for a mortgage, make sure your taxes are paid to the IRS through the current year. It’s not uncommon for small business owners to owe on their taxes, which can cause some hurdles in the mortgage application process.
As a small business owner, your journey to home ownership might come with a few extra challenges, but these are necessary hurdles to jump to show that you’re capable of repaying your mortgage. With the help of these tips and the right preparation, you can start the home loan process today.