The economic crisis has everyone scrambling for mortgages in different ways. The popular belief is that there are no longer any loans aside from the straightforward conventional loans, but this is simply not true. Because of the influx of self-employed people throughout the country, more and more lenders have started offering loans that are less traditional than a standard conventional loan. What is not true that many people have begun to believe, however, is that there is such a thing as a “self-employed mortgage.” The difference between the loans a person that is self-employed would obtain versus someone with a straight salary is simply how the income is verified. The loan terms, rates (for the most part), and all other stipulations remain similar to the conventional loans.
What sets you apart from other salaried borrowers when you are self-employed is how you receive your income. You might only take draws during certain times of the year or have a fluctuating income that you receive on a regular basis, but the amount varies quite significantly. Maybe you take a large amount of deductions and credits on your income taxes; this could greatly reduce your qualifying income in the eyes of the lender as they use your adjusted income rather than the gross amount. Whatever the case may be, there are other ways to verify your income. The easiest way, if you cannot use your last two years’ worth of tax returns and a letter from your certified accountant is to use your bank statements. The more statements you can provide, the less risky you look to the lender. Generally, they want to see at least 24 months of statements. They then evaluate the income that came straight from your business during each month and average over that period of time. This can especially help you if you have seasonal or cyclical income that rises during certain periods and falls during others.
Explanations are Important
If you are among the type of businesses that have fluctuating income, you should have your explanations ready for the lender, because they are going to ask. If you fumble around the question or do not have a straightforward answer right away, they may put less credibility towards your income. On the other hand, if you can prove that sales drop during certain periods because your product/service is dependent on the seasons or some other fluctuating factor, they can reason with the rise and fall in your income and qualify you accordingly. Some lenders will require you to write a formal Letter of Explanation that details the reasons for the increase and decrease in your income while others may just ask you verbally about it.
The most important thing you can do is realize that while there is no such thing as a “self-employed mortgage,” it is not impossible for you to get a mortgage if you are not employed by someone. The process might take a little longer, a little more creativity, and a little searching for the right lender, but the products are out there for you. Search for alternative documentation loans or bank statement loans to find lenders in your area that offer these loans and get the ball rolling to help you purchase a new home or even refinance your existing home into today’s lower rates.