Mortgage Loan Myths -- The Self-employed and Loan Qualification

One of the biggest myths about getting a home loan? 

The idea that self-employed people are automatically disqualified for a mortgage because of their employment status. While it's true that it's tougher for some in the early stages of a small business to make ends meet, being self-employed is not the kiss of death on a home loan application.

Proof of this can be found on the our websites offering a loan checklists which include advice on what to submit if you are self-employed. The notion that you can't qualify for a home loan if you work for yourself is rubbish. 

That said, it can be more difficult for some small business owners to qualify for a home loan for one simple reason; not keeping good records. You may be quite successful in your small business or as a freelance contractor, but if you can't show on paper that you have a consistent income, the lender can't conclude that you are a good risk.

Your loan application requires you to show not only that you were gainfully employed, but also what your net income was compared to business expenses. Self-employed people will also need to show a profit-loss statement. If you don't keep good records of legitimate business expenses, don't have your taxes professionally prepared, and guesstimate your profits and losses, the loan process could come to a halt very quickly for you. The question your loan officer will ask goes from "Can you afford your monthly home loan payments?" to, "How long until my applicant needs some kind of homeowner bailout program?"

This is why self-employed people should take plenty of extra time when planning to buy a home. For some, the average prep time could be about one year-especially if there are issues with credit repair or disputes on credit reports to deal with. For a self-employed person, showing reliable income for two years is a very good way to make conditions as favorable as possible to get approved for a mortgage.

That means solid record-keeping, an aggressive approach to finding (and keeping) steady work, and paying strict attention to your taxes. Remember that unlike those with traditional careers, there's an additional layer of scrutiny to the ebb and flow of steady income. If you went a long period between contracts, or if your business shut down for a time, your loan officer will want to know why and whether such periods of inactivity could happen again or how they affect your ability to make your mortgage payments.

Is it more difficult for self-employed people to get a mortgage? Yes. Is it impossible? Absolutely NOT, but you need to plan for extra scrutiny to your personal bottom line, keep good records, and be able to show your loan officer that you are indeed a good risk.