How the self-employed get mortgages

McDonough says that even borrowers with $2 million in the bank and a credit score of 800 may not be approved for a mortgage if they do not have a qualifiable income stream.

Declining income

McDonough says that one of the biggest issues is declining or unstable income, which can prevent borrowers from qualifying for a loan.

Borrowers who made $100,000 in one year and $50,000 the next will have a qualifying income of $75,000, even if they are making closer to $100,000 this year.

Martilla says that if a borrower's income declined by less than 20 percent, some lenders will qualify them based on the previous year's income and a year-to-date profit and loss statement from an accountant.

Proving the business exists

In addition to proving income, borrowers must prove their business exists. For some lenders, two years of tax returns are sufficient.

Other options for verification include a statement from an accountant, a business license, a website and client statements or copies of 1099 income statements.

Martilla says that while most self-employed individuals must have been self-employed for two years to qualify for a mortgage, sometimes an exception can be made for someone who can show one year of self-employment on their taxes as well as W2s from a previous employer in the same field.

Improving approval chances

Self-employed borrowers who apply with a co-applicant still need to follow the same process of proving income. Those who report a loss on their taxes may be better off applying only with the co-applicant's income. For example, if one borrower earns $100,000 and the other has declared a loss of $10,000, their combined income is $90,000.

"A better credit score and lower debt-to-income ratios will not necessarily help people who are self-employed, because the most important factor is their ability to prove they can repay the loan," Martilla says. "Of course, if you look at two borrowers who are self-employed in the same field and one has a credit score of 620 and no cash reserves, while the other has a credit score of 720 and $1 million in the bank, the first borrower is much less likely to be approved for a loan."

Martilla says making a larger down payment can help if the borrowers are close to qualifying and the smaller loan size lowers their debt-to-income ratio enough.

"Self-employed borrowers need to understand that the most they can borrow is simply based on their qualifiable income," McDonough says.

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