As the founder of Stewardship, I am self-employed. As a result, I obtained my current mortgage while being self-employed. Furthermore, our office has had the honor of helping countless other self-employed Arizona residents obtain their own mortgage.
Though the national lending guidelines (through Fannie Mae and Freddie Mac) make it possible for the self-employed to obtain a mortgage, there are some notable differences that self-employed people should know before they start looking at homes. Below are some important nuggets of information that we at Stewardship give to those who are self-employed.
1. No pay stubs or W2s are needed—just a tax return.
Many assume because they are self-employed and don’t receive their income traditionally—via paystub and W2—they are unable to qualify for a mortgage. This is not true! By federal law, all US citizens who have an income are required to report it to the IRS by annually filing taxes, including self-employed people. As a result, a tax return can be used to prove your income and help you qualify for a mortgage.
2. Pay attention to your actual income, not your total income.
All of us are required to pay a certain percentage of our adjusted gross income to the IRS in the form of taxes. The self-employed have more adjustments that can be subtracted from their total income to further reduce the adjusted gross income number. This is great when trying to lower the amount of money paid in taxes however, this can be bad when trying to use that income to qualify for a mortgage.
The income used to qualify for a mortgage is not the total income number on the tax return. Mortgage lenders don’t care how much total income you had. Instead, they want to know the actual income you can use. For example, if your business earned $10, but it cost the business $7 (in expenses and other costs) to earn that $10—the actual income that can be used is $3. The income number to qualify for a mortgage is the total income, minus the adjustments.
PRO TIP: If you are self-employed and know you are planning to obtain a mortgage, limit the adjustments listed on your tax return. You may pay a bit more in taxes, but you will increase the amount you are able to qualify for on a mortgage.
3. A longer income history is required.
Self-employment income can be inconsistent. Unlike those with a regular salary or hourly wage, it is harder for the self-employed to accurately project future income. Therefore, the average income from 12 to 24 months is needed to help build the case for consistency, and to more accurately project future income.
So, can you get a mortgage if you are self-employed? YES!
Would you like to see if you qualify for a mortgage? Schedule time with one of our Mortgage Advisors below!