Applying for a mortgage to buy your dream home is no small task, and can be even more complicated if you are self-employed. Being successful in obtaining a loan when you work for yourself depends on careful documentation. Unlike document preparation when you work for a company – which is generally just pulling a pay stub and bank records – you’ll need to provide much more detailed documentation when you are self-employed. As you begin planning to apply for a mortgage, use this guide to understand how to best prep your documentation.
Tax Records Don’t Tell the Whole Story
Does your income tax return accurately reflect your self-employed income? Probably not. Self-employed workers are able to take advantage of various types of write-offs to lower yearly tax bills. Unfortunately, those same write-offs can present your income as being much lower than claimed when working with your mortgage broker.
To offset the distorted picture your 1040 may paint, prepare lots of documentation to show payments received and bills paid out of those payments. If you have a home office, this is especially important. You can write typical home costs off your taxes. However, that monthly spend can make your income look significantly lower after being written off. When you bring actual receipts of payment – bank records, PayPal invoices, check stubs, however your pay is documented – as well as records of written-off bills paid, you can show a much more accurate take-home income to your banker.
Your banker may also ask to see the various ancillary tax forms that have to do with your business: schedules C and E, profit and loss statements, shareholder or partnership records, and more. It’s always a good idea to keep copies of those records from past tax years and even more so when you are planning ahead to apply for a mortgage.
Look Back, Plan Ahead
In addition to reviewing your past income as a self-employed professional, your mortgage broker is going to need assurance that you’ll continue to earn equivalent money in the future. You may be asked for a copy of your business organization paperwork, particularly documentation related to forming an LLC or corporation, or your local business license. If you’ve been operating as a sole proprietor sans license or formal business formation, it’s well worth paying the appropriate fees now to solidify your business structure. That paperwork can be a key component of your mortgage application.
In addition, you may be asked for proof of future work – copies of contracts that indicate pay structure and length of term, letters from clients with whom you contract, or paperwork that shows any agencies or employment services through whom you work. It can seem invasive to share some of that information, but it can mean the difference between a loan underwriter finding you to be a good risk or not.
Ensure You’re An Attractive Borrower
All of the pre-planning and document preparation in the world won’t land you the mortgage you need if you aren’t a financially attractive borrower. But when you begin the mortgage application process with a respectable credit score and can also show that you have the cash on hand for a down payment and closing costs, you’ll be well on your way to successfully buying your next home.
Careful planning, appropriate documentation and an attractive overall financial picture can combine to help you to become approved for a good mortgage and get you into the house you love.