Owning a home as a self-employed professional may not be as straightforward as it appears. The inherent challenges of owning your own business, the requirement for a large down payment and fluctuating income can make it challenging to qualify for mortgage loans. Furthermore, many lenders are wary of working with self-employed people due to these obstacles.
However, there are still options available to self-employed borrowers. Before making a decision, it is important to consider the pros and cons of self-employed mortgage. Understanding the advantages and disadvantages of a self-employed mortgage can help you make the best decision for your financial situation.
The Benefits of Self-Employed Mortgage
One major advantage to being self-employed is having control over your own hours – something many people value highly. Furthermore, those employed as independent contractors don’t need to worry about losing their job if they don’t meet performance objectives.
Some lenders are more accommodating to self-employed borrowers depending on the nature of their business and personal finances. For instance, mortgage brokers and credit unions may be more willing to work with these borrowers than big banks.
The Benefits of Self-Employed Tax Returns
Unlike traditional income earners, self-employed borrowers do not need to provide the same documentation for their mortgage application as W-2 employees do. However, if your business is stable and growing rapidly, having two years’ worth of tax returns with you when applying for a mortgage can prove invaluable in convincing lenders that you have enough assets to handle the debt associated with your new loan.
Depreciation and Write-Offs Offer Benefits
Lenders typically consider how much taxable income a borrower makes each year when determining if they have enough money left over after all expenses have been deducted to qualify for a mortgage loan.
Self-employed borrowers often take advantage of various tax deductions, including business expenses, to lower their taxable income and make it easier to qualify for a mortgage.
But some of these write-offs can actually work against you when it comes to calculating your net income. For instance, if you lose $2,000 in tax deductions each year, that equates to an annual loss of $150,000 that can be used as income when calculating monthly mortgage payments.
The Disadvantages of a Self-Employed Loan
In the past, it was possible to secure a self-employed mortgage without providing any documentation of income at all. This system, known as stated income loans, was abolished by the Dodd-Frank Act in 2010. Now lenders must verify a borrower’s earnings before they approve them for a mortgage.
Tax returns must also be used to confirm the income reported by self-employed borrowers. Not only do these tax returns verify income, but they also help lenders assess a borrower’s financial health.
If you’re self-employed and in search of a mortgage, consult a lender who specializes in this field and is government approved. These lenders tend to have more creative programs tailored towards your situation as well as being more lenient with credit scores and offering lower down payments than banks or traditional lenders. Also, consider the mortgage rates forecast for the market and the current economic environment prior to committing to a loan.