Matty Kimura, a Processing Expert at Better, explains what self-employed customers can expect when heading into the mortgage process.
As part of the underwriting team at Better, I know firsthand that there are a whole lot of numbers involved in getting a mortgage. That's because it's our team’s job to review and evaluate people's loan applications. The mortgage process can be confusing, but it’s especially daunting for self-employed borrowers.
In an industry where W-2 employees are often viewed as ideal candidates by traditional lenders, self-employed individuals don’t fit into the conventional financial mold that the mortgage process was originally designed to accommodate. Some lenders may have difficulty determining whether or not you earn a steady-enough income to make mortgage payments. Others simply might not want to take on any potential risk that a self-employed borrower may present.1
So did your decision to ditch the cubicle also mean that you threw away your chance at homeownership? While self-employed borrowers may have to jump through a few more hoops in the mortgage process, it doesn’t mean that homeownership is out of reach. At Better, our mission is to make homeownership accessible for as many people as possible, and that includes removing obstacles for people who are self-employed.
Mortgages the Better way
Thanks to our 100% digital application, we’re able to deliver a mortgage experience that is simple and transparent for everyone, including self-employed individuals. Better’s website is powered by smart technology that customizes your application based on what you've told us about yourself. Instead of answering blanket questions, you’ll only be asked to provide information that is relevant to your situation.
Our goal is to help you avoid much of the inefficient paperwork that traditional lenders may require. In fact, Better’s self-employed borrowers ultimately provide nearly the same amount of information in their application as our non-self-employed borrowers.
Your mortgage process can run even more smoothly if you take some time to understand what to expect as a self-employed borrower. Here are some of the factors our underwriters take into consideration.
Understanding the importance of income
In order to help determine whether or not you can qualify for a loan, we look at:
Since you won’t be using W-2s to verify your income, our underwriters will try to determine if you have an established track record of self-employment with income that is stable and consistent over a two-year period. You also need to be self-employed in the same line of business for the last two years before that income can be considered for your loan qualification. To get this information, we will need two years of your business tax returns in which you own 25% or more of the business.
Calculating income: plan ahead for tax write-offs
It’s important to keep in mind that when you apply for a mortgage, our underwriters will be looking at your net income over a two-year period. Your net income is the total after your expenses are subtracted from your total gross income. The only exception to this rule is depreciation on business purchases. The depreciation can be added back to your net income to help increase your qualifying income.
It’s typically beneficial for people to write off business expenses for tax purposes, but doing so can limit the qualifying income you have when applying for a mortgage. This is one of the top reasons why we advise self-employed borrowers to plan ahead when considering buying a home.
Calculating income: ensuring affordability
A mortgage commits you to years of payments, and we want to ensure that you’ll always be able to afford them. Because people who are self-employed tend to have more variable income, we need to account for that risk by being conservative in our calculations. That means:
If your net income has increased from one year to the next, we’re required to take the average of the two years.
If your net income has decreased from one year to the next, we’re required to use the lower value of the two years.
The down payment (avoid the paper trail)
Like all lenders, we need to verify the funds being used for a down payment. If you’re self-employed and use the same account for personal and business funds, we recommend that you keep these funds separate for loan application purposes. That’s because if business account funds are used, we’ll need to look at the business cash flow to verify that using these funds towards the down payment will not negatively impact the business. This can be a lengthy process, so separating the funds can help you avoid a paperwork headache.
Whatever account you choose, we’re required to determine which funds are eligible to use for your down payment. To do so, we’ll need to see two months worth of bank statements for any funds you plan on using for your down payment. If we notice any big transfers or deposits, we’re required to ask for explanations for the transfers, as well as letters verifying that down payment gifts from family members are truly gifts, not loans. We also won’t be able to use unsourceable funds (like cash under your mattress).
Tip: If you plan to move around money in preparation for your purchase, it’s best if you can do so at least two months in advance of applying for your loan. This will allow your funds to be “seasoned” for 60 days. As a result, there won’t be an extensive transaction history when we look at your past two months of banks statements.
We believe that being self-employed shouldn’t put a mortgage out of reach. To learn more about your options as a self-employed borrower, get our 3-minute basic pre-approval and schedule a call with one of our non-commissioned Loan Consultants.