Is it harder to buy a home using a mortgage loan when you are self-employed? Are there any additional mortgage requirements or hurdles for self-employed borrowers in 2017?
These are two of the most common questions we’ve received from our readers over the years, where self-employment is concerned. And there appears to be some good news on this front.
In 2017, there are some new and fairly flexible mortgage programs coming onto the market that could make it easier for self-employed borrowers to buy a home with a mortgage loan.
Update on Self-Employed Mortgage Loans in 2017
People who are buying a home when self-employed often encounter some extra paperwork hurdles, when applying for a mortgage loan. But that shouldn’t deter you from pursuing your goal of owning a house.
Generally speaking, lenders today are willing and eager to work with borrowers with good credit and stable income — whether they’re self-employed or not.
Here are five things you should know about buying a home when self-employed:
1. Profit-and-loss statements are usually required.
Mortgage applicants who are self-employed might have to give their lenders a profit-and-loss (P&L) statement for income verification. This has been standard practice for some time now. Mortgage lenders use profit-and-loss statements to round out the income-verification process. They also look at tax returns for the last couple of yeas, in many cases.
What’s changing now though, in 2017, is that we’re hearing of some mortgage programs that use bank statements to verify positive cash flow and income, rather than looking at tax returns. If this becomes common practice, it could make it easier for self-employed home buyers to qualify for mortgage loans. More to follow on this.
2. Fluctuating income might be scrutinized.
Self-employed borrowers with fluctuating income (that changes from one year to the next) could encounter some extra scrutiny when applying for a mortgage loan.
These days, most home loan programs take an average of the past two years of adjusted gross income, as verified by tax returns. That’s if the borrower’s income is increasing.
In cases where income has declined from one year to the next, the lender might use the lowest income level from the most recent year. This could reduce the amount that the person is able to borrow, or even disqualify them entirely.
3. New programs in 2017 offer greater flexibility for self-employed borrowers.
Over the last year or so, some flexible mortgage programs for self-employed borrowers have been coming onto the market. Granted, these are not the so-called “stated income” loans seen during the housing boom of the 2000s. But they are more flexible, particularly when it comes to income verification and mortgage approval.
For example, lenders have told us there are now loan programs that use bank statements instead of tax returns to verify the self-employed borrower’s income. This could streamline the process and even make it easier for some mortgage applicants to be approved for financing. It’s a trend worth watching.
There have also been some new developments coming from Fannie Mae, one of the “government-sponsored enterprises” that buys and sells bundled home loans via the secondary mortgage market. Reportedly, they are offering a new program that allows for just one year of tax returns for income verification — instead of the usual two years — as long as cash-flow analysis for the business appears sound.
So there are changes occurring within the mortgage industry, where self-employed borrowers are concerned.
4. Debt-to-income ratios and credit scores are important.
Your ability to qualify for a mortgage loan when self-employed will partly depend on your debt-to-income ratio and your credit score. Actually, this is true for all borrowers, regardless of employment status. These are two of the most important factors when it comes to getting approved for a home loan in 2017.
The debt-to-income (DTI) ratio is a comparison between the amount of money a person earns, and the amount he or she spends to cover recurring debts. For example, if I use about a third of my income to cover my debts (car payment, credit cards, mortgage, etc.), then I have a total debt-to-income ratio of around 33%.
Generally speaking, mortgage lenders prefer to see a DTI no higher than 45%. But this number is not written in stone. It’s just a common practice within the industry.
The point is, self-employed mortgage borrowers must show that they can manage their debt load, with the addition of a mortgage loan. And this is usually measured through DTI analysis.
Credit scores are also important when buying a home, whether you’re self-employed or working for an employer. This three-digit number scores you on how well (or poorly) you have borrowed and repaid money in the past.
A higher score will improve your chances of qualifying for a mortgage loan when self-employed, and could also help you secure a better interest rate. Bad credit could hurt your chances of buying a home when self-employed.
As with debt ratios, there is no single cutoff point for credit scores used across the lending industry. It can vary from one mortgage company to the next. Most lenders in 2017 will prefer to see a score of 600 or higher.
5. Your ability to repay is what really matters.
If you want to use a mortgage loan to buy a home in 2017, and you’re self-employed, you’ll have to show that you have the ability to repay the loan. This is what matters most. In fact, if you do a Google search for “ability to repay mortgage,” you’ll see there are some federal guidelines for lenders that stress the importance of it.
Self-employed mortgage applicants must demonstrate their ability to repay. This is typically done with bank statements, tax records, and/or cash-flow analysis. It can be verified and documented in different ways, depending on the type of loan you are using. But it must be verified, if you want to qualify for a mortgage loan when self-employed.
Bottom line: Buying a home when self-employed is do-able.
The key takeaway here is that self-employed borrowers can qualify for a mortgage loan to buy a home in 2017 — as long as they can demonstrate their ability to repay the loan.
Income stability is a key factor here as well. If your income has been stable and/or rising in recent years, you might be a good candidate for a mortgage loan. If your income has declined, you can expect to undergo some additional scrutiny.
New loan programs coming onto the market in 2017 could make it easier for some self-employed home buyers to qualify for mortgage loans. If you’re thinking about buying a home, our advice is to speak to at least two different mortgage companies to see what they can offer. You never know until you ask.
Brandon Cornett
Brandon Cornett is a veteran real estate market analyst, reporter, and creator of the Home Buying Institute. He has been covering the U.S. real estate market for more than 15 years. About the author