As a local mortgage lender, Great Midwest Bank has seen an increase in the number of borrowers participating in the “gig economy.” With the myriad of rules that apply to self-employment income, qualifying for a traditional fixed-rate loan can feel like a marathon, much like what was described in a previous BizInsights article. Luckily, local mortgage lenders are often in a unique position to cater to the self-employed, whether part-time or full-time.
To further that discussion, I thought a few other critical points could be included to help a self-employed borrower navigate the home mortgage waters:
- Less than two years? We’ll still take a look. For borrowers who have transitioned to self-employment status but remain in a similar field, some local lenders will still consider income earned from self-employment for less than two years. Common sense does have a chance of prevailing.
- Keep a current year-to-date Profit and Loss statement. I’m often surprised at the lack of internal bookkeeping for some self-employed borrowers. If you don’t have time to keep up with a monthly P&L statement on your business, do yourself the favor of hiring an accountant. Though it’s an extra expense, you’ll be able to provide the bank with current numbers when prior year tax returns are outdated. You’ll avoid surprises and likely save money at tax time.
- Report your income. All of it. This is a difficult topic for some, especially those involved in a cash business. But it’s the epitome of cake-and-eat-it-too. If it’s not reported, it doesn’t count. Cheating the government out of a few thousand dollars a year is not going to make you rich. I’d suggest it says something about a borrower’s character, which still counts in today’s world of local mortgage lending.
- But don’t write it all off! On the other hand, over-deducting can hurt you as well. Be realistic when counting your business expenses. Yes, it might cost you some in the tax column. But I’ve seen a number of self-employed borrowers who can’t take advantage of low interest rates – perhaps tens of thousands in interest savings – only because they’ll do anything possible to avoid paying Uncle Sam.
- We love explanations. Do what you can to prepare an explanation for changes in income. Sometimes they’re simple. I recently worked with a carpenter who spent half of his year caring for an adult son injured in a car accident, obviously impacting his income. Life happens, and we understand. Better to have some information for your lender up front than to have to try and come up with an answer on the fly.