If you’re self-employed, you might feel like getting a mortgage is an uphill battle. Traditional lenders often have strict income verification processes that is based on your taxable income.   Sometimes that is low because you are taking a lot of deductions.  Now you are trying to getting a mortgage and do no qualify for as high of loan as you hoped.  Fear not! With the right approach and understanding, you can turn your self-employment situation into a unique opportunity that opens doors to homeownership.

First, let’s talk about what being self-employed means in the eyes of mortgage lenders. Unlike traditional employees who receive a steady paycheck, self-employed individuals have income that can fluctuate. This can make it harder for lenders to calculate a reliable income figure. They go off averages over the past two years.  However, this is where your bank statements come into play—showing your earnings and financial health over time can provide valuable insights into your business.

When you apply for a mortgage, lenders typically ask for a couple of years of tax returns and profit-and-loss statements. These documents can be intimidating, but they also tell your financial story. If your business is thriving and your bank statements reflect a solid revenue stream, you have a powerful tool to showcase your financial stability.  This can be crucial if you had a down year and then had a great year.  There is a program that only requires your bank statements for the past 12 months.

Now, let’s dive into the specifics of how you can leverage your bank statements. Lenders often consider bank statements as a way to validate your income. If you can demonstrate a consistent pattern of deposits over the months or years, this can work in your favor. Be proactive in managing your business finances, and keep your personal and business accounts separate. This practice not only simplifies your bookkeeping but also helps create a clearer picture for lenders.

Another important detail to keep in mind is your debt-to-income (DTI) ratio. This ratio is crucial for lenders as it helps them determine how much of your income goes toward debt payments. For self-employed individuals, showing lower DTI ratios can significantly improve your chances of getting approved for a mortgage. To do this, focus on paying down existing debts and avoid taking on new liabilities before you apply for a loan.

Additionally, maintaining a strong credit score can greatly enhance your eligibility for a mortgage. Lenders look favorably upon borrowers with good credit scores, and this applies to self-employed individuals just as much as traditional employees. Even though we can use bank statements as income, you still need an average credit score for this program.

One of the most valuable assets for self-employed individuals is a substantial cash reserve. Lenders feel more secure when they see that you have savings set aside, which can act as a cushion in case of unexpected expenses or a dip in income. Aim to build an emergency fund that covers at least three to six months of living expenses; this not only helps you in daily life but also gives lenders confidence in your financial management.

The calculation of your income based on bank statements vary from lender to lender.  It's important to contact an experienced mortgage broker (I know one) to help guide you through this.  Just gather 12 or 24 bank statements and turn it in.  It's that simple!  

Remember, every self-employed journey is unique, and so are your financial circumstances. I encourage you to reach out to discuss your specific needs and how you can navigate the world of home loans as a self-employed individual. Together, we can find the best solutions for your homeownership dreams.