Homeownership is, for many, the great American dream, but it’s also one of the most expensive that most of us will ever have in our lives. So it’s no surprise that for the vast majority of Americans, buying a home is not something that involves digging deep into a wallet and handing out cash. It involves planning, saving, putting in a down payment, and then paying off a mortgage.
But while many Americans here in Sacramento get mortgages by providing financial information like their monthly salary, there are plenty of Americans—especially in California!—who are their own bosses and are self-employed, not working for a company but running their own business. How do you get a mortgage if you’re in this situation?
Are You Self-Employed?
You are considered self-employed if you meet one of the following criteria:
1. You are a freelancer
2. You are a contract worker
3. You own 25% of a business you work in
4. You are the sole owner and operator of a business.
This means that artists providing contract work to game development companies are just as self-employed as the entrepreneur starting up a new small business at home.
The Stability Question
One of the biggest differences between someone self-employed and a salaried employee is the fixed income question. With a salaried employee, once they put their monthly income down, the lender can safely assume they will always have that same, predictable, fixed amount come in every month, unless they lose their job, or get a raise.
With someone self-employed, this is not the case. There may be good months where a freelancer or entrepreneur is very busy and brings in a lot of work and profit. There may be a bad month where no sales are made. That same predictability isn’t there.
However, if you’ve been in the business for two or more years, this is a pretty good indicator that you’ve passed the “trial by fire” of being a brand new start-up, or just jumping into freelance/contract worker ring, and are more established. People with two years of financial activity in their self-employed venture can provide that information for a mortgage instead of a monthly salary amount.
It should also be no surprise to the self-employed that, when interacting with any related financial paperwork, different types of documentation are required. The same is true with mortgage applications as well. If you want to apply for a mortgage, be prepared to submit the following documents:
1. Current financial statement, with year-to-date profit and loss profit
2. Two years of business tax returns
3. Two years of personal income tax returns
4. Names of partners or stockholders
While it’s true that this is a bit more to provide than someone with a monthly salary, it’s a sign that you are an American with your own business, working only for yourself.
If you’d like to know more about your mortgage requirements when you’re running your own business, Professional Mortgage Associates can help. Just call us if you work in the Sacramento area, and we’ll be happy to answer your mortgage questions and help you get your loan.