Mortgages for self-employed borrowers. What does that mean?

If you are a self-employed borrower, is it more difficult to get a mortgage?

Let’s first look at the definition of self-employed. Mortgage lenders and tax preparers look at that term differently.

Maybe you work under your own name or a DBA (Doing Business As), and your income comes for sources that do not withhold taxes. You are definitely considered a self-employed borrower.

Perhaps you have a corporation and file a corporate tax return. You will still be considered a self-employed borrower if you own 100% of the corporation. The company payroll can consist of one employee, you.

If you hire yourself out to other companies, that company may withhold taxes from your pay and issue you a W-2 at the end of the year. You still may be considered self-employed from a lender’s standpoint.

So what difference does it make when you apply for a mortgage?

If you’re on payroll

Your base salary is the way your income is determined If you’re on payroll with a company you do not own. If you, as an employee, also get overtime, bonuses, etc, these will only be counted if you have a two-year history or receiving that category of income. Not only do you need a two-year history, but the gross amount you earned over those two years will be averaged.

The amount of your current base income is what’s important. If you received a raise yesterday, the new salary is all that matters.

If you’re self-employed

When you are a self-employed borrower, everything is averaged over a two year period. If you have recently started a business you will have to wait two years before most mortgages are available to you. Like everything, there are exceptions to the two-year rule but they will cost you.

The good news is, even though you may have to wait out the two years, there are more mortgage programs available to you. With some loans, you only need to use bank statements or a Profit & Loss statement to show your income. Most of these loans are not available to borrowers who are employed.

What if you go from job-to-job? Some employers will put you on payroll while others will give you a direct check with no taxes withheld. In this case, from a lender’s perspective, you are self-employed.

There are many nuances and many ways to structure your loan so consider these only basic guidelines.

We can help you with the details when you’re ready.