Your desire to be your own boss does not need to prevent you from owning a home, purchasing rental property, financing business property, or obtaining a line of credit. Being self-employed does not automatically prevent you from qualifying for a California home loan. You can qualify for the same mortgages as a person who is employed by a company or another person. The fundamental factor for a self-employed borrower is the ability to provide sufficient verification of your income.
Applying for a California Mortgage as a Self-Employed Borrower
When you are a self-employed borrower, you may need to provide additional documentation and paperwork that an employed borrower may not be required to provide to qualify for a mortgage. The documentation is to assure the mortgage lender that you have sufficient income to repay the loan.
When you apply for a mortgage, the application process is the same regardless of your employment status. The mortgage lender requires specific documentation from every applicant, including documentation regarding income, debt, credit history, and property valuation. The information is used by the lender to determine your capacity to repay the mortgage and whether the property has sufficient value to secure the loan.
During the mortgage underwriting process, an underwriter uses the information provided in your application to calculate your debt-to-income (DTI) ratio. A DTI ratio evaluates how much income you have available after paying certain debts. The underwriter calculates the DTI based on your current debt and also based on your debt when the mortgage payment is added to the list. Your DTI is only one factor the mortgage lender uses to determine your capacity to repay a loan. The lender also reviews your credit history, other assets, cash savings, and other available sources of income.
Regardless of whether you are self-employed or employed, the process of calculating your capacity to repay a mortgage is the same. However, a borrower who is employed may only need to provide a current pay advice and a W-2. A self-employed borrower does not have a pay advice or a W-2; therefore, the individual must provide additional documentation to verify income.
Documenting Self-Employed Income
When applying for a California mortgage as a self-employed borrower, you will not have a pay advice of W-2 that you can use to verify your income. You must use Profit & Loss Statements, balance sheets, and tax returns to verify your income. The lender may require a longer income history as part of the underwriting process.
A problem a self-employed borrower often encounters is lower taxable income. Most business owners maximize their deductions to lower their taxable income. However, a lender is only interested in the bottom line. Therefore, you may be required to submit Profit & Loss Statements and balance sheets for several quarters so that the lender can verify you are earning a profit that may be higher than your taxable income because of allowable tax deductions on your tax returns.
Ideally, you need to establish a steady stream of income from your business that demonstrates you can afford to pay the mortgage payments. If you can establish sufficient income from your business and you meet all other normal requirements for mortgage approval, you should be able to qualify for a California mortgage. Call today to schedule your personal consultation with California Community Mortgage.