March 31, 2017
Loan programs today require lenders to verify the borrower can demonstrate an ability to repay the new mortgage, taxes, insurance along with current credit obligations by comparing income and debt. Most borrowers today are employees and receive a regular pay check or two each and every month. It’s relatively simple for a lender to verify monthly income when someone gets a paycheck on the 1st and the 15th because the gross monthly income is printed on the pay stub along with year to date earnings and deductions. W2 forms from previous years are also required. Lenders want to see at least two years of being employed and W2 forms fill that requirement. But if you’re self-employed, it’s a little bit trickier. Even if you pay yourself on particular days of the month the lender needs more information from you. Here are 5 steps to score a mortgage when you’re self-employed.
1. Check Your Credit. Okay, not exactly limited to a self-employed borrower because everyone needs to be on top of their credit standing. Look at your report and see if there are any glaring errors that need fixing. If you find any mistakes, document the error and let your loan officer make the correction for you. Your loan officer can typically fix a mistake within 24 hours whereas it could take weeks or even longer on your own. Are there any credit accounts associated with your business that appear on your report? Then your lender will likely add them into your personal debt totals if you can’t document the payments are made by the company each month.
2. Speak with a Loan Officer Early On. As part of the regular pre-approval process, speak with a loan officer before you get too much further along. Your loan officer will ask that you complete a loan application and supply sufficient documentation needed in order to issue a pre-approval letter. If there are any issues you need to address upfront your loan office can identify them for you. For instance, you have two MasterCards, one in your name and one in your company’s name. Even though the company card is for business expenses only unless you can document those expenses have been paid and deducted as a business expense in your tax returns, they might be counted against you, twice. Your loan officer can tell you how to properly document issues in your loan file. Don’t wait until after you’ve already found a house.
3. Get Your Pre-Approval Letter. After speaking with your loan officer, submitting your loan application and documenting your file, your loan officer will provide you with a pre-approval letter. A pre-approval letter essentially states that you’ve not only submitted a loan application but your credit, income and assets have been reviewed and all you need is a property.
4. Find Your Tax Returns. You’ll need your two most recent filed federal income tax returns along with your loan application. Your loan officer will add the most recent two years of net business income and average them together to arrive at a monthly figure. You will also be asked to provide personal as well as business returns.
5. Put Together a Year-to-Date Profit and Loss Statement. You’ll need a YTD P&L so you might as well get started now. Most likely one that has been prepared by you is sufficient but sometimes lenders want one prepared by your accountant.
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