Mortgage tips for the self employed can be summed up in two words: plan ahead. Self employed people face the common perception that they are high risk borrowers, based on their variable monthly incomes and on their lack of official income documentation. Lenders like to see steady monthly income from their loan applicants, and generally self employed people can’t prove they have such steady income without pay stubs and W-2s. Documenting income and preparing to apply for a loan are important steps for self employed people. Self employed people go through a different process than wage earners when applying for a home loan.Tips for the self employed, therefore, have a different focus than those for traditional loans. Wage earners should demonstrate long term employment and good credit, while self employed people have the extra responsibility of proving their monthly and annual income. They should be able to show a lender three years of financial records proving their income, up to date client contact lists, and audited financial statements verifying income.One of the main issues with self employed income is that the bank uses personal and business tax returns to determine income. Many self employed people deduct a large amount on their tax returns in order to lower their net income on which they must pay taxes. In this situation, self employed people can appear to have low income and high business expenses, reducing their chances of being approved for a loan. Suggested mortgage tips for the self employed who face the problem of artificially low income due to tax return accounting are to take fewer deductions for a period of 2-3 years prior to applying for a home loan, and to pay more federal taxes during the same period in order to report higher income.Many self employed people wear all the hats in a business, including keeping track of expenses and doing taxes. In some cases, records may not be as accurate or meticulous as a lender would like to see. For this reason, mortgage tips for the self employed always include planning ahead so that the individual can provide the necessary paperwork to the lender when applying for a home loan. While net income may appear low, records may not be available, and client lists may not be updated now, knowing that all this paperwork will be required for a mortgage allows the self employed to prepare for future homeownership.
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