Proving your income when you have a traditional corporate job is relatively simple. You can show years of paystubs to prove you have a stable track record with employment and a consistent weekly, bi-weekly, or monthly pay. Proving stability and income when self-employed is a little more difficult, but it’s not impossible.
Longevity is Key
A major contributing factor to self-employed individuals receiving denial letters is a lack of track record. While most self-employed people know that self-employed does not mean unemployed, but you really have to prove you have a stable income and that you have been self-employed long enough to maintain your income ratio moving forward. The number of tax deductions you take may also make your debt-to-income ratio look higher because your income is based on your net rather than your gross. You need to be prepared to show a high enough income level to prove that you can make a monthly mortgage payment.
Documentation is Critical
The bank will want just as much documentation from you, if not more, than they would ask someone with traditional employment. Documents you’ll need will definitely include bank statements and tax returns (for at least 2-3 years), as you’ll rely more heavily on these to prove your income. Your bank may also ask to see your profit and loss statements, broken down into quarters or some other manner. You may need to work with an accountant to have officially reviewed statements to provide.
Anything you can give your lender to show that your business has grown from year to year will be especially helpful.
Check Your Credit Score
Make sure you do some work to ensure your credit score is up to snuff. We all realize how tough starting a business can be and your credit score may suffer a bit in those formative years. But you need to get things back on track. Repay debts and check your credit score regularly. Do what needs to be done to bring your score back into a favorable range, if it isn’t there already. Try to approach the process without any consumer (credit card) debt.
Having money on hand for a deposit, or for savings in general, shows you are in a good financial position. You’re going to want to have enough for your down payment, closing costs, and a significant enough amount leftover to show the lenders that you’ll be able to continue mortgage payments if your business hits a rough patch.
Self-employed does not mean unemployed and it certainly does not mean you can’t buy a house. Find a lender who understands the unique struggles of the world of self-employment and you’ll be well on your way to home ownership.