If you’re self-employed and thinking about what you need to buy a house in New Jerse , you may be wondering if there are any self employed mortgage loans that might be of interest to you.
Mortgage lenders require proof of income before approving a mortgage, which can be difficult if you don’t have a W-2 or a recent paycheck.
Self-employed workers must be previously prepared to prove their income. Don’t know how to achieve it? Don’t worry, our NJ real estate attorney is here to help. Call us today or schedule an appointment at one of our offices located in Ridgewood and Newark.
Everything You Need To Know About self Employed Mortgage Loans In New Jersey And The Rest Of The United States In 2022
The process of obtaining a mortgage loan involves the submission of a large number of documents, since the lender needs to analyze the entire financial picture before granting a loan.
As a self-employed individual, a lender will usually ask you to collect your full financial details for at least the last two years. These can be demonstrated through the following documents:
- Asset lists.
- Debt lists.
- Federal tax returns.
- Credit score.
- The amount of income.
When a borrower works for someone else, lenders look to the employer to verify the amount and history of the applicant’s earnings, along with their likelihood of continuing to earn income. However, self-employed individuals must submit the necessary documentation that demonstrates that their income is stable.
Is It Difficult To Get Mortgage Loans When You Are Self Employed?
Although self-employed workers are held to the same standards as W-2 workers, the process can be more complex. This is because lenders need to consider:
- The viability of the self-employed business.
- Your earned income.
In addition, lenders are generally concerned with whether borrowers, including the self-employed, can repay their loans on time and consistently. To do this, they need to determine if the income is high enough to pay the mortgage.
JPMorgan Chase Community Lending Management ensures that business stability requires documentation, including evidence of work, payments, and activities that support business operations.
Data To Be Taken Into Account By The Self-Employed
- Self-employed workers must have at least 2 years of self-employment income, based on Fannie Mae and Freddie Mac criteria.
- In some cases, a borrower may qualify for a mortgage if they have been self-employed for a year, but to do so, they must meet other criteria, such as working in the previous years in the same occupation with similar or higher income.
Do Lenders Offer The Same Policies For Self-Employed Mortgages?
Policies vary depending on the lender and the type of US mortgage loan being obtained. Therefore, comparing prices can be somewhat complex if you work on your own. In these scenarios, it is important to have an expert in the area, our attorney Carolina T. Curbelo will be able to help you determine this.
What Are The Requirements For Self-Employed Mortgages?
Some of the documents required to apply for a mortgage loans being self employed are the following:
- Current bail insurance statement (the policy must be at least 2 years old).
- Letter from your Certified Public Accountant (CPA), Enrolled Agent, or Tax Preparer.
- State and business licenses that may be required in your profession.
- Evidence of workers’ compensation and liability insurance from your employer.
- Having at least one year of personal and business tax returns for income documentation purposes and W-2 forms if your business is incorporated.
- You may require a DBA registration (Doing Business As) issued at least 2 years ago. If using a DBA, you must provide proof of current self-employment with 2 months of business account statements, creditor statements, or company invoices.
- Bank statements verifying the amount you have in personal savings and investment accounts to show that you can make a down payment while maintaining savings in case of loss of income.
- You may be required to provide a year-to-date profit and loss statement. Usually audited by a certified public accountant. Unaudited statements may require your most recent business bank statements.
- Government issued ID.
- List of debts and expenses, both business and personal.
- IRS Form 4506-T, which gives third parties permission to access your tax records.
- Earnings statements.
- Canceled checks for your mortgage or rent.
- Any additional income. For example, social security or disability.
These self-employment requirements differ slightly from the general requirements for applying for a mortgage in New Jersey.
Additional Documents Required
Certain lenders require additional documentation, such as a statement from your accountant and your clients. Before you send the documents, make sure they are organized and up-to-date, as lenders don’t want to have to come to you for your recent statements.
Mortgages backed by government-sponsored companies, such as Fannie Mae and Freddie Mac, require verification of business operations. In addition, you must provide evidence of your work, either:
- Business payments.
- Active websites.
These measures are required 120 days before the closing of the mortgage. Self-employed workers, however, must provide proof of stable income as closing day approaches. If you lose your job before you close on a mortgage, it may delay your application or even lead to your application being rejected.
In addition, you must provide:
- Driver’s license.
- Utility bills for the last 3 months.
- Council tax bill.
- 6 months of bank statements.
- Household bills.
- Travel and commuting costs.
- Credit card and store card repayments.
- Catalogue credit accounts.
- Car financing agreements.
- Loan repayments.
Tax Return Forms And Types Of Businesses
Depending on the type of business you work in, you must provide the appropriate tax return forms:
- Sole proprietors: They must present the document Schedule C.
- General Partnership: Form 1065.
- Limited Liability Company (LLC): Form 1065 or Schedule C if only one person owns the business.
- Corporation C: Form 1120.
- S Corporation: Form 1120S, Schedule K-1s.
How To Get A Mortgage For Self-Employed?
Here are some guidelines to prepare yourself before you apply for a self employed mortgage loans. In addition, you can obtain further and complementary information in our blog on what not to do when applying for a mortgage.
1# Check Your Credit Score
The first step before applying for a loan is to check your credit score. If you need to make improvements, be sure to fix any errors before going to a lender.
Remember that the higher your credit score, the more attractive you are to lenders and you may qualify for a lower interest rate which can save you a lot of money. The FICO score is the metric most used by lenders to assess your risk.
The score generally ranges from 300 to over 800 and the lower it is, the higher your interest rate will be. A lender typically grades your score as follows:
- Exceptional: Between 800-850.
- Very good: Between 740-799.
- Good: It is usually around 670 or 739.
- Fair: From 580 to 669.
- Poor: From 300 to 579.
If you have negative items on your credit score, talk to a home loan expert to get it fixed.
2# Improve Your Debt-To-Income Ratio
One way to improve your chances of being approved for a mortgage as a self-employed person is to improve your debt-to-income ratio. You can do this through increased income and reduced debt.
3 # Determine If You Require A Self-Employed Mortgage
Please note that you may be classified as a self-employed borrower if you:
- Own 25% or more of a single business.
- Work as an independent contractor or service provider.
- Work for a company that pays you as a freelancer instead of an employee and provides you with a 1099 form for your services instead of a W-2.
Lenders may consider themselves to be at high risk if they lend to a self-employed person whose income tends to fluctuate from week to week.
To avoid this, additional proof that the self-employed business is stable and that they have enough cash flow to handle a month of low profits might be enough to qualify for a loan.
Your lender will probably ask you a few additional questions about your business if:
- You do not receive a guaranteed salary.
- You receive a 1099 form for the income instead of a W-2 form.
- Your earnings are shown on Schedule C of your tax returns.
4# Learn About The Mortgage Requirements For The Self-Employed
While the accuracy of the criteria varies by lender, in most cases, you should expect them to assess your financial health, the viability of your business, and the amount of experience you have as a business owner.
When evaluating your application, your lender may consider these 4 criteria:
- How the business operates. The lender will want to know if your business is financially stable, how much demand there is for your product, how likely it is that your business will sustain itself financially, and even how profitable it is to cover expenses.
- The stability of your income. Lenders want to see evidence that your monthly payments are consistent and predictable to cover your mortgage. This is usually proven by the most recent tax returns to verify your self-employment income.
- Personal income and business income. Your lender may want to see evidence that your business is maintaining a healthy cash flow and is not overburdened. Depending on the structure of your business, your business and personal tax returns may be required so that your business losses can be compared to your profits.
- How long have you been self-employed? Although your lender will likely want to see that you have at least 2 years of experience earning as a self-employed, the approval process may be simpler if you have more years of experience. For example, if you have been self-employed for at least 5 years, you may need to submit less documentation.
5# Gather Your Proof Of Self-Employment Revenue
It is very likely that a lender will require the following:
- Your two most recent personal tax returns. However, some lenders may only require last year’s tax return if you have been self-employed for at least a year.
- Your two most recent business tax returns. Depending on your type of business, you must file the indicated form.
- IRS transcripts. You may need to sign a Form 4506-T so the lender can get a transcript of your tax return. This is because the lender must verify that the information you provide matches what is in the IRS.
- Statements of profit and loss. Lenders expect earnings similar to or greater than what you made on your tax returns.
- CPA letters. Lenders may ask your tax professional for a letter of explanation verifying your self-employment status or clarifying specific details.
- Documentation of business funds used for down payment. If you’ve accumulated cash in your business accounts, be prepared to:
- Obtain a letter from your tax attorney or other financial professional confirming that taking your funds is unlikely to harm your business.
- Provide a copy of your business returns for the lender to review the overall health of the business.
- Provide your business bank statements to show the trend of your balances and expenses.
6# Understand How Lenders Calculate Your Self-Employment Income For A Mortgage
The vast majority of lenders analyze self-employment income based on some version of Fannie Mae’s 1084 cash flow form. To decide if you as a self-employed person qualify for a mortgage, a lender considers your net income, that is, your gross income minus the costs you incur in doing your business.
Note that gross income for the self-employed is calculated a little differently than it is for W-2 workers:
- For a salaried or hourly employee, the gross income is the amount of money you earn before taxes and other deductions are taken from a paycheck (for example, retirement contributions).
- As a self-employed person, your gross income is the amount of money you earn before you take into account your expenses.
For example, if you are a self-employed contractor, you can file an IRS form, Schedule C, which asks you to deduct business, advertising, office supply, or utility expenses from your total gross income.
The remaining amount left after deducting expenses is considered net profit or loss. This number is what lenders use for loan qualification.
7# Find The Best Mortgage Loan Company For The Self-Employed
Certain self-employed lenders not only offer conventional loans, they may also offer loans insured by the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA) or the US Department of Agriculture (USDA) .
However, you should check with your loan officer to compare lenders’ rates until you find the one that’s right for you.
#8 Consider Alternatives To Self employed Mortgage Loans and Programs
If you don’t qualify for a traditional mortgage, you may be interested in a non- QM mortgage. This type of mortgage loan allows you to qualify based on alternative methods instead of traditional income verification.
Check with our firm to determine if you may be eligible for this program.
9# Enlist A Co-Signer
A parent or relative of yours may be willing to co-sign your mortgage loan. However, you should keep in mind that this person must be willing to take on the responsibility that comes with a loan.
Tips When Applying For Self Employed Mortgage Loans
While your application process is under review, it is important not to do anything that could compromise your chances of success. To do this, you must take into account the following:
- Don’t add new debt. It is important not to take on any new debt before you apply or while your application is being reviewed. Lenders check to see if you can afford the loan, but including new accumulations of debt can affect your chances of getting the loan.
- Prepare your initial payment. Please note that during the application process, your lender will require proof that you have sufficient funds to cover the down payment.
- You must be patient. The mortgage application process takes time, so don’t be surprised if the process takes more than a month. Therefore, it is important to have as many documents as possible at the beginning of your application.
- Keep business expenses separate. Making commercial purchases such as office supplies or the like to your personal card will increase your credit utilization, which will have a negative effect on your application. To avoid this, keep business and personal expenses separate by giving them their own accounts and credit cards.
Frequently Asked Questions About Mortgage Loans For Self Employed
In general, it is more difficult to get a home loan if you are self-employed, since these have more requirements. Also, some lenders do not offer loans to the self-employed.
Home loans are not necessarily more expensive, but it is important to get the best possible deal from different lenders.
The longer you can prove your self-employment income history, the more likely you are to be approved for a mortgage.
Although not all mortgage lenders require large down payments from the self-employed, some lenders want to lower their risk by making the down payments higher. This results in a lower loan-to-value ratio (LTV).
To qualify for an FHA loan or a VA loan, you need an average credit score of at least 580 points. While for conventional loans, a score of at least 620 points is required.
Jumbo loans depend on the amount of the loan, but usually range from an average of 680 to 740 points.
Lenders are trying to figure out what you’re doing and whether you’ll be able to repay them, plus they’re trying to figure out how likely you are to continue earning.
Self-certification mortgages were specifically designed for self-employed workers, these mortgages allowed them to self-certify when they earned in a year, without the need to provide proof for it. However, these mortgages were banned in 2014 due to concerns that borrowers might not be able to repay their loan.
Why Curbelo Law Can Be The Best Solution To Request Mortgages For The Self-Employed?
If you are self-employed, you will have to go through some additional obstacles to get a mortgage loan. As in any other process, these documents can be complex, especially if you have never applied for a mortgage before.
To get more information directly about what you should do with these mortgage applications, contact us today and we will provide you with the best possible advice on this matter. Our attorney has over 10 years experience helping borrowers through the arduous mortgage process.