Realtor Q&A: Special mortgage concerns for the self-employed home buyer

Q. I’m self-employed, and some friends who also are self-employed have told me that this will complicate the process when I go to apply for a mortgage. Why? Is there anything can I do to make the process easier? Will it affect my ability to buy a home?

A. Applying for a mortgage when you are self-employed is slightly different from if you were an employee, so you just want to be prepared. The first thing you will want to do is select a mortgage lender who has experience working with self-employed applicants. You might want to choose one who has alternate mortgage options for the self-employed. The biggest challenge you will face is proving your income to the lender, especially if it isn’t always consistent. Mortgage lenders will need to see two years’ worth of tax returns. As always, before you go house-hunting, meet with your lender and obtain a pre-approval letter, which helps save time, money and frustration.

There is more paperwork when you fill out the mortgage documents when you are self-employed. Lenders need to see the paper trail of your income sources to make sure you can qualify for the mortgage you desire.

This is a good time to talk about co-mingling of your business and personal accounts. In a nutshell, don’t do it. That may be easier for you initially, but when you are applying for a mortgage it can raise red flags. Having separate accounts for your business and personal finances will make it easier for the lenders to follow the paper trail.

Even though you run a business, you will still need to have a good credit score, so evaluate yours and see if you need to improve it. Some lenders may provide tips for raising your credit score, and some may offer free credit repair, so check into that as well.

I cannot end without discussing taxes. Talk to your lender about lowering your tax deductions for a few years before applying for a mortgage so you will have a good, solid income to show lenders. The reason for this is that lenders look at your income after expenses. If you have a bunch of business deductions, it will lower your qualifying income.”

- Maura Bain, member, Hampton Roads Realtors Association and Realtor with Berkshire Hathaway HomeServices Towne Realty, Chesapeake

A. Self-employed borrowers must document their income and follow guidelines just like any borrower does. The mortgage company will use your tax returns to verify income. Guidelines for self-employed have recently loosened to a degree, making this an excellent time to consider your options. Have your Realtor help you find a lender who will take the time to analyze your specific situation and help you get pre-approved in order to take advantage of the low rates out there today.

- Becky Claggett, ABR, CRS, Hampton Roads Realtors Association 2016 chairman of the board and managing broker at Century 21 Nachman Realty, Virginia Beach

A. Unlike those employed by others, for whom the traditional W-2 forms clearly display annual earnings, those who are self-employed have additional things to take in consideration when evaluating their “true” income. The irony in being self-employed is that, when it comes to taxes, we write off things that are related to our business expenses to help avoid huge tax bills. But it also makes it tricky to show lenders just how much revenue we actually make.


Self-employed mortgage candidates typically need to show two or three years’ worth of tax information. It’s much more likely that a salaried employee will make the same amount of money each year, as long as job roles and rate of pay stay consistent. It’s quite different for a self-employed person who not only experiences highs and lows in earnings, but also months of high volume and weeks or months of little-to-no business. That’s why lenders want to look at the bigger picture and view earnings over a longer period of time, and average things out.

Keep all earnings and tax records to make things easier when applying for a mortgage. That will ensure a smooth process and increase your likelihood of getting the mortgage you deserve.

- Suzie Harris, member, Hampton Roads Realtors Association and Realtor with Re/Max Central Realty

A. Being self-employed can certainly present more of a challenge to obtaining financing than for those who are employed by a large entity and, yes, it may affect the amount of money you can borrower or even affect your ability to purchase a home altogether. Self-employed individuals tend to present a greater risk to the lender than employees of a larger company and, therefore, have to prove not just income, but also stability given that they are the ones responsible for their own income.

Also, they must consider the deductions you take. Deductions certainly prove beneficial to self-employed individuals since they reduce tax liability. However, this may hinder your ability to qualify (the reason being that self-employment comes with a lot of expenses, and the IRS allows you to claim those expenses, resulting in a reduced taxable income). It’s a great perk, but when it comes time to qualify for a mortgage, this may present a challenge. What you are taxed on is also the income lenders will use to evaluate how much you can afford to borrow. However, some deductions can be added back in, so it’s important to discuss your options with a qualified mortgage-lending professional.

What hinders self-employed individuals most is a pattern of fluctuating income, declining income and/or a low bottom line. If you ask any self-employed individual, he or she will likely say the process requires a lot of paperwork. It takes a skilled lending professional to review your documents and counsel you accordingly.

To make the process easier, start compiling the documentation you’ll need before you even start looking for a home. This includes the last two or three years of complete tax returns with all schedules, W-2s, 1099s or other income forms you have associated with the income you receive, and all pages of your recent bank statements to prove your assets. Also, be prepared for the lender to pull your credit and have you provide a complete mortgage application.

- Leigh Sturm, MRP, Realtor with the Hampton Roads Realtors Association and Berkshire Hathaway HomeServices Towne Realty, Chesapeake
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