Lenders take a close look at your income and debts when you apply for a mortgage, and that is especially true if you are self-employed. While most of your application process will be the same, it will be different in some ways.
Tax returns. You’ll have to provide two years of tax returns, and the lender will use that to determine your average monthly income. If you take a lot of deductions, your income will appear lower on paper than what you actually take home.
Planning. You may need to plan for your home purchase earlier than someone who has W-2 income. Planning a two or more years in advance can allow you to decrease your expenses and deductions in those years, which will make your income higher, according to BankRate.com.
Mortgage rate. Because a self-employed person is considered a higher risk than someone with a traditional income, lenders may charge you a higher interest rate, Nerd Wallet says. Good credit and a steady payment history my allow you to refinance for a lower rate down the road.
Other ways you can help your case:
- Purchase a property with a smaller mortgage
- Look for a home without a homeowner’s association; you won’t have to pay those fees
- Keep good business records and make sure you have separate business and personal accounts and credit cards
- Lower your debt load by paying off other loans like your car loan or student loan
- Consider making a larger down payment
- Consult an expert, like a financial planner, who can help you get in the best shape possible for a home purchase