Owning a business is the American dream for many people. After all, who doesn't want to be the next Steve Jobs or Mark Zuckerberg? And while being self-employed comes with a unique set of perks, it also requires some unique steps in the homebuying process. Because self-employed individuals typically have income that fluctuates and debts that could be tied to their business, lenders will require additional pieces of documentation, but don't let this deter you from realizing the dream of home ownership! If you are an entrepreneur and want to purchase a home, keep reading to learn the types of documentation you may need, as well as any obstacles that could get in your path so that you can properly prepare.
While the actual homebuying process including the application, rate qualification, credit and income requirements, underwriting, etc. are the same for both self-employed and employed homebuyers, the documentation aspect of the process is relatively different. Whereas someone who is employed for a corporation can access their W-2 forms and get proof of employment, self-employed employees will have to provide a few more pieces of information to their lender in order to accurately assess their true financial picture.
In general, all borrowers and co-borrowers, if applicable, are required to submit the following:
A driver's license or government-issued photo identification
Social security number
Bank and liquid asset account statements
Address information for the previous two years
If a current homeowner, loan information
Self-employed applicants typically must submit at least two years' worth of federal tax returns, as opposed to one year for employed applicants.
Profit and Loss Statement
A profit and lost statement, commonly referred to as your P&L, provides a comprehensive snapshot of the revenues, costs, and expenses that your business incurred over a period of time. Since business owners may typically not receive traditional paychecks to validate income, the P&L provides lenders with the information they need to understand if a business is profitable. That impacts how the lender views the financial standing of the business owner/borrower.
While bank and financial statements are required from all borrowers, self-employed applicants are required to submit statements from both their personal and business accounts. Again, lenders want to accurately assess your full financial picture, including personal and business debts and liabilities. To help make things as clear and uncomplicated as possible, avoid mingling expenses between the accounts.
Partnership Tax Returns
If more than 25% of your business is owned by another individual or entity, your lender will require copies of the previous two years' corporate/partnership tax returns.
Getting a mortgage approval while being self-employed is certainly not impossible, but it will require some diligence and copious recordkeeping to ensure you can answer any and all questions regarding the health of your business. Like all potential mortgage applicants, one of the first steps to ensuring you're on the right path to homeownership is to seek out a mortgage loan officer that is knowledgeable and available to answer all of your questions. A good loan officer will partner with you from start to finish, ensuring you know exactly what documentation you need and keeping you informed of any potential challenges that you may face along the way.