Is A Mortgage Loan Possible For Self-Employed People?

Self-employment has numerous benefits, but when it comes to securing a mortgage loan, it can lead to challenges. Although getting a loan is not impossible, there are a few additional hurdles you have to jump before being approved. If you are self-employed and want to buy a home, here is what you need to know.  

How Does Self-Employment Impact Lending?

Lenders require self-employed applicants to submit tax returns to prove income. Depending on the lender, you could be required to submit two more years worth of earnings. Unfortunately, the tax returns do not always paint a clear picture of your finances and could lead to a denial for a loan.  

As you know, being self-employed means that you can use business expenses to help reduce how much taxable income you have. When a lender looks at your tax return though, the deductions are not considered. Your income is. As a result, the lender might not make a fair assessment of what you earn throughout the year.  

Another challenge to being self-employed and looking for a loan is that lenders could have qualms about approving a loan if your income is not consistently at a certain amount each year. Even though you are still in a position to pay the loan back as agreed, the lender might be concerned that fluctuations in pay could result in a default later.  

What Can You Do?

There are several steps you can take in the year leading up to applying for a loan that could lessen the chances you are denied. One of those actions is to ensure that your debt to income ratio is reasonable. Lenders need to see that there is room enough for you to take on the loan.  

You also need to re-evaluate your deductions on your tax return. Deductions help to lower your taxable income, but also makes you less attractive to lenders. If you are able to lower the deductions you have throughout the year, your taxable income will be higher and your chances of getting a loan increase. It is important to note that doing this could mean a bigger tax bill for you in the next year.  

In addition to these measures, consider applying for an alternative income verification loan. The loans are designed for people in your situation  and take into account the special circumstances that come with being self-employed.  

Talk to your real estate agent about your situation before starting your search. He or she more than likely knows other ways you can overcome any issues that could occur with getting a loan.