Navigating the world of mortgages can feel overwhelming, especially when you’re self-employed. I get it—it’s not just about proving your income; it’s about presenting your financial story in the best light. My name is Trevor Sanders, and as the owner of SD-Loans, I’m one of the top mortgage brokers in San Diego California, and I’ve helped countless entrepreneurs and freelancers in San Diego secure their dream homes. Let me guide you through the process with practical advice and insights tailored to your unique situation.
Understanding the Challenges of Self-Employed Borrowers
Why It’s Different for the Self-Employed
When you’re self-employed, traditional pay stubs and W-2 forms don’t apply. Instead, lenders will look at your tax returns, business income, and overall financial health. While it might seem like extra scrutiny, the key is being prepared.
Common Misconceptions About Self-Employment and Mortgages
Many believe being self-employed automatically disqualifies them from getting a mortgage. That’s not true. With the right preparation, lenders are more than willing to work with you.
Steps to Get a Mortgage While Self-Employed
1. Get Your Financial Documents in Order
Lenders need a clear picture of your finances. Here’s what you’ll typically need:
- Tax Returns: Expect to provide at least two years of personal and business tax returns.
- Profit and Loss Statements: These help show your business’s current financial standing.
- Bank Statements: Both personal and business accounts may be reviewed to assess cash flow.
2. Improve Your Credit Score
Your credit score plays a huge role in determining your mortgage eligibility and interest rate. Here’s how you can boost it:
- Pay off outstanding debts.
- Correct any errors on your credit report.
- Avoid opening new credit accounts before applying.
3. Save for a Larger Down Payment
A bigger down payment can make you a more attractive borrower. Aim for at least 20% to avoid private mortgage insurance (PMI).
4. Work with a Mortgage Broker Who Understands Self-Employment
At SD-Loans, we specialize in helping self-employed individuals like you. We know what lenders are looking for and can guide you to the best options for your situation. We know exactly how an underwriter will evaluate your income based upon your business structure.
What Lenders Look For
1. Stable Income
Consistency is key. If your income fluctuates, lenders will average it over the past two years.
2. Debt-to-Income (DTI) Ratio
Your DTI ratio compares your monthly debt payments to your income. Keeping this number low—ideally under 45%—is crucial.
3. Business Longevity
Lenders prefer borrowers who have been self-employed for at least two years. It demonstrates stability. If you have been in business for over 5 years, we can resort to looking at only your past years of tax returns! We use this strategically when working with CPAs and our clients when gameplanning for homeownership.
Tips for Strengthening Your Application
1. Separate Personal and Business Finances
Keep your personal and business accounts separate. This makes it easier for lenders to assess your financial health.
2. Limit Write-Offs
While deductions lower your taxable income, they can also reduce the income lenders see. Strike a balance between saving on taxes and showing sufficient income. Call me before officially filing your returns so I can evaluate your qualifying income ensuring you qualify for the home loan amount you desire while also paying as little as possible in taxes. We will find the happy medium.
3. Consider a Co-Borrower
If you have a partner with a steady income, applying together can improve your chances.
Mortgage Options for Self-Employed Borrowers
1. Conventional Loans
Conventional home loans – These are a popular choice but require a strong financial profile.
2. Bank Statement Loans
Instead of tax returns, these loans use bank statements to verify income. They’re ideal for self-employed individuals.
3. FHA Loans
With more lenient credit and income requirements, FHA loans are worth exploring. Their down payment is as little as 3.5% down.
4. Profit and Loss Statement Loans
These loans allow you to qualify based on your business’s profit and loss statements, providing flexibility for self-employed borrowers.
5. DSCR (Debt Service Coverage Ratio) Loans
Ideal for real estate investors, these loans evaluate the property’s income rather than your personal finances.
6. Asset Depletion Loans
These loans use your liquid assets to determine eligibility, making them a good option for those with significant savings or investments.
7. Interest-Only Loans
These loans lower your initial monthly payments by allowing you to pay only the interest for a set period.
8. No Ratio Loans
Designed specifically for owner-occupied properties, these loans let you qualify without traditional income or employment documentation, ideal for clients with strong assets or alternative financial profiles.
Why San Diego is a Unique Market
1. High Home Prices
San Diego’s housing market is competitive. A strong mortgage application is essential to stand out.
2. Growing Freelancer Community
With more people embracing self-employment, lenders are becoming increasingly accommodating.
FAQs
- Can I get a mortgage with less than two years of self-employment?
Yes, some lenders may consider your application if you have strong financials and previous employment in the same field. - What credit score do I need for a mortgage?
Aim for at least 620, though higher scores can help you secure better rates. Anything above 760 will offer premium pricing. - Do all lenders offer bank statement loans?
No, but SD-Loans works with lenders who specialize in these options. - Can I qualify for an FHA loan as a self-employed borrower?
Absolutely. FHA loans are more flexible and ideal for those with lower credit scores or smaller down payments. - How can I get started with SD-Loans?
Reach out to us at [email protected] or call 619-855-5061. We’re here to help!
How SD-Loans Can Help
At SD-Loans, we pride ourselves on tailoring solutions to fit your unique needs. From helping you gather documents to securing the best rates, we’re with you every step of the way.
Why Choose SD-Loans?
- Personalized service
- Competitive interest rates
- Expertise in self-employed mortgages
Self-Employed & Buying in San Diego? We Can Help.
Getting a mortgage while self-employed in San Diego doesn’t have to be a daunting task. With the right preparation, a clear financial plan, and the guidance of experienced professionals like us at SD-Loans, homeownership is well within reach. Remember, every journey starts with a single step—let’s take that step together.
Contact Us Today!
Call us at 619-855-5061 or email Trevor directly at [email protected]. We’re passionate about empowering San Diego residents to achieve their homeownership goals.