Self employment is the American Dream, right? You set your own hours; you make lots of money and live the simple life, right? It’s not quite that easy. Many people who enjoy being self employed do so because they have earned the right to do so.

What most people do not understand is that self-employed people do have bosses, they are called customers. The customers dictate what time you will go to work and what kind of money you will make. You do not get the benefit of overtime; company sponsored health insurance, or paid vacations. There are no sick days or personal days. In the beginning, the days are long and hard while building a clientele. But, if the business model is sound, in three to five years, the hard work pays off. There is a regular stream of income and outflow of cash, with a little left over to treat yourself every now and again. And then it comes time to purchase a house.

The toughest part for a getting a mortgage for self employed person is in obtaining a mortgage is proof of income. While gross receipts are generally sufficient to support a mortgage loan, it is the net amount, after payroll, insurance, taxes and any other write offs you may have, that the lender is interested in. This is the amount that the lender will use in order to determine if you are qualified to obtain a mortgage.

Getting Approved for a Self Employed Mortgage

In order to prove income, a lender is not going to take your word for it. They are going to want to see several years’ worth of tax returns. In many instances, the amount of money, after write offs, is not going to support obtaining a mortgage. To have the best chance, this number should be as high as possible. Of course, this means that you’ll be paying more federal income tax.

There are more roadblocks to obtaining a self employed mortgage. Most lenders would like to see contracts for upcoming work, significant down payments, and a six month mortgage reserve, meaning that a lender would want you to escrow six months worth of payments in order to protect the lender against potential loss. Also, a self employed person needs to be able to demonstrate that they have been in business for a minimum of two to three years.

While many lenders will turn you down without a blink of an eye, it is possible to get a mortgage if you are self employed, if you are willing to work to find a lender who has some experience in underwriting loans for people who are self employed.

There are programs out there that lenders can use that allow self employed people to show income through bank statements and perfect credit reports as well as verify assets in order to qualify for a mortgage without having the traditional burden of having to prove income. These nontraditional types of loans will usually cost the borrower a bit more in interest and fees, but may well be worth the extra expense.

Many times, a lender will ask that a borrower sign an IRS form giving them the right to audit tax returns in exchange for offering a no income verification loan. If the income amounts on the tax returns significantly vary from the amounts stated in the original loan application, the lender will then have the right to recall the loan. Lenders are utilizing this process more and more often to avoid having to fully document a self employed loan, as the process is much simpler and straightforward, though many times the borrower may be reluctant to provide full audit rights to the lender. In this case, a lender will require full documentation of the loan in order to qualify the individual.

Non traditional loans, or no income verification loans are on the rise due to the number of laid off people turning to home based businesses to generate income. Lenders are attempting to deal with the influx of nontraditional loans, so the self employed person may run into stumbling blocks along the way. Don’t be discouraged. Understand that this process will take longer than financing a traditional mortgage because of the added time it will take for the self employed individual to find an experienced lender who will offer them a fair deal. Be aware that some lenders can and have excessively marked the interest rate up on nontraditional loans in order to hedge against loss if the home based business were to go under. Do not settle for an atrociously high interest rate. Shop around and choose the best deal you can find.

The bottom line is this, the system does service the self employed borrower though the hurdles may be somewhat higher than those for more traditional borrowers. The good news is that the market is changing, and in someway is actually better for the self employed person as there are enough of them out there now that there are loan officers who are actually becoming specialized in the area of home mortgage for self employed people.