Here is how you can help borrowers with less traditional employment records get approved for the right mortgage loan.
Help Them Gather Paperwork
One of the biggest obstacles is the necessary paperwork. It is easy for someone with a W-2 job to show their income over time – the yearly W-2 they receive from their employer shows everything a lender needs. However, a self-employed person will need to show their completed personal and business tax forms. Two years is the general recommendation, though you might ask your borrowers to have up to five years handy in case the lender needs more documentation.
Additionally, the borrower will need to show documents related to the current business year, including their up-to-date business license, a profit-and-loss statement for the year, and documentation showing they remain in business and that their business provides enough income for the loan. An accountant with industry knowledge may need to create some of these items.
If the borrower’s income varies wildly, they might need to provide explanations of dips in income and the plan they have undertaken to avoid such slowdowns in the future.
Ensure Their Credit is in Tip-Top Shape
Sometimes, when someone starts a business, they rely on personal credit to bridge the gap between W-2 employment and profitability. That can mean a period of high debt-to-income ratio (which may not be over, depending on how well the person’s business is doing and how long they’ve been in business) or missed payments when cash flow is low.
If your borrower has some credit blemishes, you might counsel them to wait until those drop off their credit report or they have at least a year of stellar payment history. If your borrower is carrying a lot of consumer debt, then they might want to focus on paying it off as much as possible before applying for a loan.
Work on Deductions
Savvy business owners typically take a lot of deductions to lower their taxable income and accurately represent their costs of doing business. However, lower than average taxable income can hurt someone applying for a loan, especially one as large and long-term as a mortgage. When you and your borrower are reviewing their tax forms, you might point out when the deductions they’ve taken can harm their chances and what they might want to do as they prepare their taxes going forward.
Explore Many Loan Types
Although most borrowers are in the market for a standard conforming 30-year mortgage, a different loan type might better serve self-employed borrowers. Depending on where your borrower is looking for a home, they might qualify for a USDA or FHA loan. If they’ve had prior military service, a VA loan might be the right option.
Although it can seem challenging for self-employed individuals to get approved for a mortgage, it is possible. It’s just a matter of educating them on what it takes.
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