If you are self-employed, don’t give up hope of ever buying a home. You may have heard that regular, W-2 employees have and easier time getting loans, and get loans with lower rates. While it’s true that some banks may not want to loan to a self employed borrower due to the increased risk that may be involved, it is also true that there are mortgage products out there for you.
Before we look at some mortgage options, here are some things to consider. As someone who is self-employed, you may pay higher interest rates than the ones you see advertised by lenders. Those rates are for prime borrowers, with steady incomes that can be verified, and excellent credit ratings. You also may not be able to negotiate with lenders for a lower interest rate, and you may have to shop around to find lenders who have mortgage products for the self employed.
One thing that lenders may specifically look for is the income reported on your tax return. If you have used lots of write-offs to lower your taxable income, it may look as if you do not make enough money to pay for a house. Also, banks may request a larger down payment from you. Because of the mortgage crisis, banks are not as willing to lend money to what they consider a riskier investment. There are some options, however. Here are some loan types that some lenders may be willing to give you.
Mortgage options for the self-employed
Stated Income/Stated Asset Mortgage (SISA). Stated income loans are sometimes also called low-documentation loans because they are based on the income you report to the bank. Banks will not try to verify this amount, but they may try to verify the sources of your income. In this case, you could give them client lists or investment sources. Banks sometimes ask you to submit an IRS Form 4506 or 8821. Form 4506 requests a copy of your tax return directly from the IRS and costs $39 per return. Form 8821 gives your lender permission to go to an IRS office and look at the return years you specify. There is no cost for this service.
No Documentation Loan. In this type of loan, the lender will not try to verify any of your income. You might choose this option if your income tax returns show a business loss or a low profit. Because of the risk involved to the lender, your mortgage interest rate may be higher. Low and no documentation loans are called Alt-A mortgages. They fall between prime and sub-prime loans in terms of risk and interest rates.
Full Documentation Loan. For those who can prove their incomes, the full documentation loan should have lower interest rates than low or no documentation loans. There is usually more paperwork involved with these types of loans in order to prove income, such as previous years’ tax returns, a current business license, a statement from your accountant, balance sheets, etc.