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Why Self-Employment Doesn't Lock You Out of a Loan

Why Self-Employment Doesn't Lock You Out of a Loan

Applying for a mortgage can be time-consuming and stressful, but this isn't the case for borrowers who choose the best lender to work with. The situation is similar for prospective borrowers who earn a living from self-employment or as a business owner.

Applying for a mortgage can be time-consuming and stressful, but this isn't the case for borrowers who choose the best lender to work with. The situation is similar for prospective borrowers who earn a living from self-employment or as a business owner. For these individuals, getting a mortgage, let alone a good one, used to be a trying process. But when working with a lender like us, with innovative solutions for a wide variety of mortgage borrowers, this old belief doesn't really apply.

As explained by U.S. News & World Report, self-employed persons and business owners may face several obstacles in the mortgage application process when compared to the average applicant earning income reported on a W-2. In addition to verifying your income and assets, lenders must also look closely at your business itself, understand its operations and assess its viability. This is complicated by the fact that income from self-employment can be inconsistent, even if it is substantial in aggregate. Finally, the ways in which self-employed people and business owners report and structure their assets adds another layer to the underwriting process. Many entrepreneurs take advantage of multiple tax deductions to reduce total tax liability, but this has the consequence of making bottom-line income appear lower upon examination by a loan officer.

"The current financial system was not designed with the self-employed in mind," Brad Walker wrote in an article for Realty Biz News. "The number of self-employed individuals three or four decades ago was just a tiny fraction of what it is today, and the vast majority of business processes in the financial industry were developed under the assumption the consumer was an employee with a regular, predictable income."

Solutions for the self-employed

Self-employed mortgage borrowers need to look beyond the traditional name-brand financial institutions when it comes time to apply for a home loan. Fortunately, there are now more lenders than ever who cater specifically to these niche markets with innovative solutions to common pain points in the mortgage application process.

One option utilized by modern mortgage lenders involves bank statement programs. These programs allow loans to be made based on verified deposits into the applicant's bank account over a certain period, rather than through pay stubs or tax returns. This offers an easy fix for self-employed individuals or business owners who earn variable income and take tax write-offs that reduce their bottom line earnings.

Cash flow qualification is also an important tool for lenders that work with self-employed borrowers. As Walker of Realty News Biz explained, cash flow is becoming an increasingly important metric in determinations of credit risk, but it's one that is not reflected in any credit report. That's why lenders that offer cash flow qualification services to self-employed or business-owning applicants benefit from increased security and lower credit risk. Of course, those borrowers benefit too once they have a mortgage to help them purchase the perfect home.

Get in touch with one of our Loan Officers to learn more about SmartSelf, our innovative mortgage solution for self-employed borrowers.