The title “self-employed” applies to more than just freelancers. Business owners—particularly small business owners—will also have to work a little harder to get a qualified mortgage in KC than regularly employed applicants.
In general, a good credit score and a low debt-to-income ratio is still essential to attaining a mortgage. However, even self-employed applicants with these assets may still have difficulty getting a qualified mortgage because they are a higher risk to lenders. If you are self-employed and plan on applying for a qualified mortgage in KC, you can improve your chances by:
- Keeping good financial records
- Avoiding reducing your tax liability
- Maintaining a relatively consistent income
- Signing with a co-applicant
Solid Record Keeping
New mortgage rules state that lenders must be able to prove your ability to repay. During this process, your lender will require your personal and business tax returns from the last two years, a profit-and-loss statement, and a balance sheet.
Lower Taxes vs. Larger Mortgage
Deductions can come back to haunt you during the mortgage application process. Many people who are self-employed list business expenses on their tax forms in order to pay fewer income taxes.
However, increasing your expenses and lowering your profit margins will decrease your qualified income, as well as your chances of obtaining a qualified mortgage in KC. Therefore, you need to decide which is more important to you: having lower taxes or getting a larger mortgage.
Consistent Income Over the Last Two Years
Lenders will often average your last two years income. While this practice usually does not affect regularly employed applicants, self-employed applicants’ income usually varies from year to year. That means that if you make $25,000 one year and $75,000 the next, your lender will most likely consider your qualified income as $50,000 regardless of whether or not you think you’ll make more in the future. Doing the math on your own before being pre-approved for a mortgage in KC is a good way to tell what you’re getting yourself into.
If you don’t qualify for a mortgage on your own, you can attempt to apply with a co-applicant. Co-applicants with a better self-employment history or even those who are regularly employed can improve your chances of getting a qualified mortgage in KC.