How to get approved for a mortgage while self-employed

Ginger Dean

October 25, 2013

By: Ginger Dean, Home Finance Specialist

In: Finance and Legal

If you're self-employed and trying to get approved for a mortgage, you may have already discovered it's a little bit harder for you than for the average salaried applicant. Wondering why?

There are two main reasons:

  1. Self-employed individuals are considered high risk. Their income is not guaranteed and can fluctuate from year to year. This makes banks wary of approving mortgage applications because banks like stability.
  2. Cash flow can sometimes be a problem with self-employed individuals. A small business may have a lot of sales or a high valuation, but the money is tied up in assets so the cash flow can be tight. Banks like liquidity. In their eyes, clients who have a steady cash flow will pay their bills on time.

So how can you keep working for yourself and still get a mortgage approval? Extreme organization and careful saving will go a long way:

Keep receipts and track everything. If you are self-employed you are most likely very diligent when it comes to keeping track of your income and expenses - or at least you should be. Keeping your receipts for daily expenses, tracking your spending, and investing in assets helps your accountant file your tax return at the end of the year, but it also helps banks evaluate your spending habits. Banks will often ask to see your income tax returns for income verification, but they will also ask to see your "books," a.k.a. your balance sheet, to evaluate your money management, cash flow, and profitability.

Hold on to your complete tax return. Some people say that you should keep your tax returns for seven years in case the IRS performs an audit; however, I keep all of my tax returns. That's right, I still have the very first tax return that I filed way back in 1996. Of course, I wasn't self employed back then, but you get the point. Banks will usually ask to see the most recent tax return for salaried employees, but they ask for the last three years for self employed individuals. Make sure that you keep your full tax return to show total income, deductible expenses, tax credits, and, of course, your taxable income.

Make sure to keep some cash on hand. Having a lot of sales or high profitability is great, but if you don't retain any of your income then your mortgage application will not get approved. I have a client who grossed $250,000 in sales last year with his organic oil business, but he put all the money back into the business. If you don't have any cash for the down payment, notary fees, etc. your mortgage won't be approved.

Are you self-employed? What has your experience been with getting a mortgage loan approved?


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