When you're self-employed, the process of applying for any loan gets more complicated. There's a line on the application for "employer," another for your boss's name, and another for the contact person of your HR department – but you have nothing to put into these cookie cutter slots. Things get even more confusing when it comes time to take out a mortgage. You simply don't have a conventional employer or W2 to show as proof that you can make payments. Don't let the difficulty sway you from buying a home as a self-employed person. Here are some tips for house buying in your situation.
Plan ahead – way ahead.
While a traditionally employed person may be able to decide they want to buy a home and go out and do so the next month, you'll need to play further ahead than this. Typically, lenders want to see at least 2 years' worth of tax returns in order to approve a loan for a self-employed person. So, you want to make sure you're filing your taxes properly and not taking deductions you're not 100% qualified to take. If you declare too many deductions, this may reduce your take-home income, meaning that you won't be approved for as large of a mortgage as you might actually be able to pay. If you do your own taxes, it's a good idea to have an accountant look over your taxes or perhaps completely prepare them for you before you apply for a mortgage – just to make sure everything is done properly.
Look for a mortgage lender who does manual underwriting.
Some mortgage lenders take a "quickie" approach to loan approval. They look up your credit score, verify your employment, and hand out the loan. This doesn't tend to work well for self-employed people since the situation tends to be a bit more complicated. You want a lender who does what's called manual underwriting. This means that they will take the time to look further in depth at your history of paying bills, your income and its sources, and your financial habits. They'll probably sit down with you and actually talk through your situation rather than expecting you to fit your complex life and finances into pre-made form. Credit unions are more likely to offer this service than big name banks.
Once you've found a lender who is willing to manually underwrite your loan, find some people who can serve as references as to your financial responsibility. This could be someone you've paid for services on a monthly basis for several years, a long-term customer who can vouch for your swiftness in handling business matters, or the like. Since your loan company can't talk to your employer, they'll appreciate being able to talk to these other people.
Keep these tips in mind as you prepare to shop for a new home.