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Are you self-employed and looking to take advantage of low prices and low interest rates to refinance your home or upgrade to a new home? New lending laws effective in 2014 require more documentation from you. Here are a few tips to help you get your qualified mortgage application approved:
- Prepare for a detailed analysis of your income by presenting your lender with income tax returns from the last three years. If you’ve been self-employed for fewer than two years, consider holding off on your mortgage shopping until you have a well-established business practice.
- If you’re banking on getting a QM, keep in mind you’ll need a maximum 43% debt-to-income ratio.
- Provide evidence substantiating year-to-date income — e.g., profit and loss statements and monthly bank statements on your businesses, securities activity and income property.
- Lenders are now required to determine trends in your self-employment income. If your income trends downward, the lender is required to use your most recent profit and loss statement as a basis for establishing your debt-to-income ratio.
- Highlight clients with whom you’ve had long and consistent contracts, along with charts or spreadsheets on your monthly income and expenses for the past couple of years. Include written lease agreements with current tenants to prove an established source of rental income.
- Provide a balance sheet presenting all your assets and long-term liabilities so the lender can judge your wealth as a source of repayment. Again, trends in your income will be scrutinized.
- Maintain cash reserves and be able to document the source of the deposits – e.g., an inheritance or simply accumulated wealth and earnings from your occupation.
- Pay off all credit cards and other short-term debt by carrying no balance beyond current monthly charges.
- Be prepared to offer an explanation for any income fluctuations and extraordinary flows of money.
- Apply for your mortgage with a local community bank or credit union since these smaller lenders will take the time to process a mortgage application and have personnel who can make discretionary decisions. It is also important to make sure the lender understands a freelancer’s tax return, since the adjustable gross income (AGI) is very different from taxable income.