As the gig economy grows,1 more freelancers and contractors are looking to buy homes. Lenders who understand the financial situation and unique needs of these homebuyers, will be better able to serve them in today’s competitive market.
Here are five common questions self-employed mortgage clients are asking their lenders—and smart ways for you to answer.
1. Can I buy a home if I’m self-employed?
Being self-employed can bring challenges to the homebuying process, but it can be done. Explain to your prospect that the most significant step will be proof of self-employed income. They will have to show business viability and provide additional paperwork in the absence of a W2.
2. What are mortgage requirements for the self-employed?
Outline the process for clients, walking them through each step. The list of requirements they should submit may include:
- Two years of personal tax returns
- Two years of business tax returns, if applicable
- Business licenses
- A statement from a CPA that you’re currently in business
- A balance sheet
New COVID-19 regulations also require that clients submit one of the following:
- An audited profit and loss statement, or
- An unaudited profit and loss statement, plus two months of business account statements
Get to know more about your client’s business to determine if they’re eligible for exceptions that could eliminate some legwork. For instance, if they’re a sole proprietorship, they may not have to provide business tax returns, and those with over five years of documented business history may only need to submit tax returns for one year.
3. How can I increase my chances of mortgage preapproval?
Empower your clients to take charge of their financial situation and increase their chances of attracting lenders. Recommendations you might make are:
- Improving their credit score: Have clients review credit reports thoroughly for any inconsistencies or errors. Self-employed homebuyers want to show stable payment history and aim for a credit score of at least 720 to get the best mortgage rate.
- Offering a larger down payment: Inform homebuyers of the twofold benefits of a larger down payment. First, it shows their commitment to the investment. Second, it decreases the borrowed amount and, in turn, may secure a lower rate.
- Paying down debt: Clients need to assess the sum of their debts to verify that their debt-to-income (DTI) ratio is 43% or less.2 Self-employed homebuyers should be careful of writing off too many expenses as it may decrease their business reporting income and increase their DTI.
- Providing a strong self-employment history: The general rule is at least two years in their current employment, but newly self-employed mortgage applicants may still be eligible if the scope of their self-employment is similar to a previous job.
4. What kind of loan can I qualify for?
Educate potential homebuyers about what’s possible. The good news is that being self-employed doesn’t disqualify them from traditional mortgages or non-conforming financing. When discussing non-conforming loans, highlight the pros and cons of the sometimes-risky alternative window of opportunity.
5. What if I don’t qualify for a mortgage?
Let them know that you’re committed to helping them. Even if clients don’t get approved the first go-round, they have more options, including other resources, non-conforming loans, and personal lending opportunities. But stress that they can still go the conventional route. By making a few improvements to their business or financial standing (such as working with tax and accounting professionals), self-employed mortgage applicants can improve their position and apply again.
Remember to remain patient, responsive, and flexible from the first steps of prequalification to closing. Chances are your self-employed clients are real go-getters. They’ll want a lender that is, too.