Imagine having great credit, you never missed a payment, you have a lot of home equity, and a booming business. You’re the ideal loan candidate! Except the lender just denied your loan. You are self-employed. Most people would not automatically connect self-employment with difficulty obtaining a mortgage, but the barrier is present and often seems impossible.
We spoke to Mike Pacheco, the founder of Qualified Home Loans, to help understand some of the top reasons that self-employed borrowers have difficulty obtaining the loan they apply for. Mike created QHL 10 years ago as an answer to the tightening credit market that occurred during the Great Recession.
Since then he has been featured for his unique problem solving in many publications such as Top Agent Magazine and Orange Coast Magazine. He gives his insight on why some applications, particularly for self-employed borrowers, are doomed to fail..
Why Is Getting a Mortgage Harder If You’re Self-Employed?
“Income, income, and income” Mike says. Self-employed people such as freelancers or independent business owners may find it hard to document their full income according to lending guidelines, which is the primary obstacle to obtaining a loan.
A traditional employee can quickly produce a W2 and proof of stable income. In the less predictable world of self-employment, it can be challenging to meet the lender’s income standards. It is common for lenders to reject a loan without explaining what can be done to change it.
Hopefully, you’ve now identified why getting a mortgage may be harder based on your status as self-employed. The best thing is to get tips from industry professionals like Mike Pacheco to plan your next step.
Common Challenges For Self-Employed People Seeking a Mortgage
The team at Qualified Home Loans has identified the main challenges of getting a mortgage you might face as a self-employed individual. Here are a few to review to help your planning.
Too Many Write-Offs: Taxes can be complicated regardless of employment, but self-employed have even more layers. Additionally, tax write-offs are available for self-employed people and allow you to write off business expenses to lower the overall amount of taxes you owe.
When using tax returns to qualify, lenders use your net income after write offs, not your gross income. Understanding how you appear on paper is incredibly important. Advisors such as Qualified Home Loans are here to help you enhance your knowledge ahead of time.
Set Up Poorly: Many lenders are built like a funnel. They push everyone into the process by quoting options without really knowing if the loan will work or not. They then rely on underwriters to sort out who qualifies or not, leaving only clean and easy loan files to come out the other end.
This is especially detrimental for those without a “vanilla” situation like self-employment, rental property, LLC’s, etc. As Pacheco explains: “Loan Structure is everything. Setting up a loan application to clearly and cleanly document that it meets that lender’s specific criteria is critical to success.” Without the right knowledge and experience in the initial part of the loan process, it is easy to see why some loans are set up for failure. A good loan officer will do a fair bit of diligence before committing to a specific loan option.
Recently Became Self-Employed: This may be the biggest challenge that newly self-employed people face. Demonstrating your stability of income with a short history of being self-employed could be an obstacle. Lenders need to verify that your business has been operating for two years as a baseline for deciding whether or not to lend you money.
Pacheco says: “Nearly every loan program requires at least a two-year history of being self-employed, even if it allows for alternative methods of documenting income.”
An airtight paper trail will be the secret tool in your arsenal to obtain a mortgage.
Going Forward to Seek a Mortgage While Self-Employed
Seeking a mortgage while self-employed can seem tricky, but it doesn’t have to be! A clear paper trail, sustainable plan, and strategic approach will help you secure the loan needed to own the property of your dreams. And you aren’t doing it alone – there are so many resources available to make this dream a reality.
The assistance of industry professionals like Mike Pacheco and the team at Qualified Home Loans, for example, is invaluable. They specialize in non-bank opportunities that match non-traditional workers with non-traditional lending opportunities. Self-employment is fulfilling and allows people to realize their passions. With assistance, there is no reason it should keep people from a fair mortgage.
For more information, don’t hesitate to reach out to Mike Pacheco’s team.