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Mortgages for the Self-Employed

Aug 18, 2007
When you are applying for a mortgage, usually the lender will focus on your financial history over the past 2 years. For employees, that means 2 years of personal income tax returns, as well as W-2s and paycheck stubs. If you are self-employed, that changes the usual process a little. For one thing, you probably won't be able to provide W-2s or paycheck stubs.

Many lenders specialize in working with borrowers who are self-employed. It's worth your time to shop around for a lender you're comfortable with, who has done this type of loan before. Be aware that it may take a little longer and involve a bit more paperwork, but mortgages for self-employed people are approved every day.

By the way, you may be surprised to find that you fall into this category. If you are employed by a business that you own 25% or more of, you're considered self-employed. If you own a construction company equally with your 4 siblings, you own 20% so you're not considered self-employed. If you own the same company equally with 2 siblings, you own 33% so you're considered self-employed.

The lender will be concerned with your financial stability, and the financial health of your business. After all, in this situation, if your business fails, you are likely to default on your mortgage, as well. So, the lender will be checking two sets of documents - your personal financial records, as well as your business records.

You'll need to supply your personal income tax returns for the past two years. If your company is incorporated, you'll also need to supply two years of income tax returns for the business. The lender will often also request a current balance sheet for the business, as well as a current profit and loss statement.

If your credit is good and you don't have any other major loans, the lender may simply work with the first two pages of your personal tax returns for the past 2 years. In this case, your financial history is strong enough that they aren't concerned about the business. However, this is the exception.

The documentation you'll need to furnish, and the way it's viewed by the lender, depends on the structure of your business:

- Sole Proprietor
- Corporation
- Partnership

Sole Proprietor

As a sole proprietor of a business, you own the whole thing. Your business income and expenses will appear on Schedule C of your personal income taxes. Your taxable income (or net income) is considered your total revenue (or total income) minus expenses.

Corporation

If your business is set up as a corporation, it's separate from your personal income. The lender will need to see your corporate tax returns for the past two years, as well as your personal tax returns.

Partnership

If your company is a partnership, the lender may ask for two years of tax returns from the business. On the other hand, if your credit score is high and your current loans low, again, they may simply work with your personal tax returns.

The amount of documentation necessary can be greatly reduced for those with strong credit scores. Many self employed borrowers, due to their excellent credit, have the ability to state their income, provide limited documentation (3 to 6 months bank statements) or even provide no documentation. As these reduced documentation types add additional risk to the lender, they typically have slightly higher interest rates than full documentation loans.
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