Self Employed – Assuming a Mortgage

Getting a mortgage as a self-employed individual can be more complex than it is for traditional employees, but it’s certainly achievable with the right preparation and understanding. Here are some key steps and tips to help navigate the process:

1. Organize Your Financial Documents

• Tax Returns: Lenders typically require at least two years of personal and business tax returns. Ensure these documents are complete and accurate.
• Profit and Loss Statements: These provide a clear picture of your business’s income and expenses.
• Bank Statements: Both personal and business bank statements will be needed to verify income and financial stability.

2. Maintain a Good Credit Score

• Your credit score plays a significant role in mortgage approval. Aim to maintain a score of 620 or higher, although higher scores will qualify you for better rates and terms.
• Pay off any outstanding debts and avoid taking on new debt before applying for a mortgage.

3. Show Consistent Income

• Lenders look for consistent or increasing income over the past two years. Declining income can be a red flag.
• Some lenders may average your income over the past two years, while others may take the most recent year’s income if it’s higher.

4. Prepare a Larger Down Payment

• A larger down payment (20% or more) can increase your chances of approval and may also help you secure a better interest rate.

5. Reduce Business Expenses

• While it’s beneficial for tax purposes to maximize your business expenses, for mortgage approval, a higher net income will be more favorable.
• Consider delaying large business purchases or investments until after you secure your mortgage.

6. Establish a Strong Business History

• Lenders prefer borrowers who have been in business for at least two years. A stable and long-term business history demonstrates reliability.

7. Consult with a Mortgage Broker

• Mortgage brokers can help you navigate the complexities of obtaining a mortgage as a self-employed individual. They have access to a variety of lenders and can help you find the best fit for your situation.

8. Consider Alternative Lenders

• Some lenders specialize in mortgages for self-employed individuals and may have more flexible requirements.
• These lenders might consider other factors like assets, reserves, and overall financial health rather than strictly adhering to traditional income documentation.

9. Document Additional Income Sources

• If you have other sources of income (e.g., rental properties, investments), make sure to document these as they can strengthen your mortgage application.

10. Stay Organized and Responsive

• The mortgage process for self-employed individuals often involves more documentation and scrutiny. Stay organized and responsive to any requests from your lender to keep the process moving smoothly.

By thoroughly preparing and understanding the specific requirements, you can improve your chances of securing a mortgage as a self-employed individual.