Mortgages for self-employed people. Those words don’t normally work together well. But if you work for yourself, the following will give you just the edge you need.
Consumers have been much more trustworthy than financial institutions lately, but the banks still have the money. If you’re self-employed and you want a mortgage, you’re going to have play their game. (For this post, I’ll assume you have good credit. If not, read “How to Get A Mortgage With Bad Credit.”)
The banks are going to want verifiable income. To satisfy them, you’re going to have to cough up your personal and business tax returns. Even when you give the banks your tax returns, they might not believe what they see. Why?
Well…remember…this is America. Self-employed people often claim high tax deductions if they can get away with it. This reduces taxable income and that results in lower taxes. But it also means that it’s harder to show enough income to qualify for the loan when you need it. That could be a problem.
You have to plan ahead. If you know you’re going to need a mortgage in the near future, bite the bullet. Be more conservative with your tax return. Show higher income (and yes…pay higher taxes.) This will help you qualify for your mortgage and (more importantly) it will make our government officials very happy. One caveat: Wild fluctuation in income could trigger IRS audit flags. Be honest and careful.
Business Financial Statements
You’re going to have to show profit and loss statements and income statements. Besides taking the advice suggested above, it’s really important to have a good recordkeeping system in place.
For my business, I use Quickbooks (which you can get now at a 20% discount) and I highly recommend it. Whereas I used to have to scramble whenever I wanted to show my financial statements, now I can produce them at a moment’s notice. Don’t wait to implement a record keeping system. Plan ahead and get it going today. Don’t thank me…I’m just doing my job.
Savings and Investment Statements
Usually you only have to show your most recent savings and investment statements, and in rare cases you can use this to your advantage.
A friend of mine and his wife want to buy their first home. They are both self-employed. They have stable businesses and plenty of income. They also have a good-sized down payment, but because they are self-employed it’s not enough for the banks.
Jenny, my pal’s wife happens to have a very wealthy family. Her dad wants to help the couple buy their first home. He doesn’t want to make a huge gift to them because he doesn’t want to file a gift tax return. Instead, he’s making a “loan.” Dad forks over the money and the couple puts the proceeds into an investment account. The kids will have to pay market interest of course – but the banks probably won’t see this money as a loan if they do it well in advance of applying for the loan. Of course if the bank asks how long the money has been there, they’ll have to be honest. It never pays to cheat.
When the bank asks to see their investments statements, this couple will be able to produce statements with a large deposit. That will help them qualify for the mortgage much easier. Of course this is a very tricky move and I wouldn’t recommend doing this for 99% of the people I know.
Banks have lending rules in order to protect themselves and you. If you get in over your head on a mortgage you can’t afford, everyone pays the price. If you’re self employed, how did you qualify for a loan? What was your experience?
On to the weekend reading:
Coupon Redemption Statistics
Money Hackers Carnival