Just because you are self-employed does not mean you cannot qualify for a mortgage. Many investors believe that being self-employed eliminates them from many loan programs. The real issue, however, is not the employment, but the income. If you are self-employed, you can take advantage of write offs, depreciation and other deductions that let your accountant reduce your taxable income as much as possible. This is good around tax time, but if you are looking for a loan, lenders will look at your debt-to-income ratio as one of the main criteria for loan approval. Getting a loan when you are self-employed is difficult, but far from impossible.
It’s not what you make, it’s what you keep. That is the mindset that lenders have when underwriting loans. You may think that loan approval wouldn’t be an issue if you have a large amount of gross income, but lenders look at the bottom line numbers of the net profit and loss and the adjusted gross income. They want to see that you have this established income for at least twenty four months. You may have had a great 2012, but unless you can back it up with 2013 numbers, most lenders will not approve your loan.
Lenders have also gotten wise in approving loans with just the lease on the subject property. On average, 75% of the rental income can be used for income purposes, but only if that income is documented. For any lease under one year, they will go off the rent schedule on the appraisal or the current lease with cancelled checks. If you are looking to use rental income on a property you are not claiming on your tax returns, the lender will not use that even if you have the lease and cancelled checks.
The starting credit score point for most investor programs is 700, with many at 720. A 720 score is considered excellent with no “lates” in the last twelve months. Even if you do show ample income and have money to put down, you must follow through with the other piece of the approval puzzle and maintain your credit score. If you are actively looking for lender financing, you need to monitor your score and make sure there is nothing on your credit report that would lower your score. You may make plenty of money and have cash to put down, but if you do not have a high enough score, lender financing will be out of the question.
The minimum down payment for investment loans varies anywhere from 10-30%, depending on the number of units and lender. It is important that this money is seasoned in an existing account for at least 60 days and with some lenders 90 days. Any large deposits must be verified and accounted for. If there is not a paper trail for the underwriter, they may have a tough time allowing the deposit to be used.
Getting a loan as a self-employed borrower requires more time and an increased amount of paperwork. Once you get past that, the income is usually the biggest hurdle. If the income is there, a self-employed borrower purchase is much the same as most other purchase. Keep an eye on your credit score and make sure you put any down payment money in an account as quickly as possible. Buying a loan as an investor is difficult, but it certainly can be done.