With San Diego’s softening housing market and greater motivation among sellers in 2019, prospective buyers, including self-employed individuals, are more likely to find good deals on listed condo properties. Even with the reduced prices on downtown San Diego condos for sale, most condo purchases still require mortgage financing, which is handled differently when borrowers are self-employed. Just like with mortgage applicants who earn salaries or hourly wages, lenders are interested in being able to verify financial factors such as down payment, income, work history, credit score, and ability to repay the loan. Here are some recommendations for self-employed mortgage applicants.
Gather Your Complete Tax Returns
In general, the paperwork burden tends to be higher for self-employed borrowers and small business owners when compared to their salaried counterparts. Whereas a wage earner with a high credit score may only need to present copies of W-2 forms, self-employed applicants will be asked to provide copies of their tax returns for the previous two years. Whenever possible, the paperwork should include 1099 forms received and all other attachments. In some cases, copies of tax returns can be requested from the IRS in report form, but some banks will require full copies, particularly with Fannie Mae, Freddie Mac, VA, and FHA loan applications. The good news for 2019 is that this requirement may be reduced to just the most recent tax return, based on recommendations from the automated underwriting system (AUS).
Hire an Accountant
If the AUS recommends manual verification of employment and income even after evaluating tax returns, it may be a good idea to get a certified public accountant (CPA) involved. The bank may want to look at cash flow, accounts payable, and accounts receivable, and it’s always better to have an accountant prepare these reports. If the applicant is a member of a limited liability company, the bank may not process a mortgage application unless the bookkeeping records are presented by a CPA.
Improve Your Credit Score
Getting a favorable recommendation from the AUS engine is often contingent upon a high credit score and good credit history. For this reason, building up credit records before applying for a mortgage loan is crucial for self-employed borrowers. Since the home-buying process is easier with a mortgage preapproval letter, it’s better to sit down with a loan officer so he or she can obtain a tri-merge credit report and calculate the type of AUS response it may get. The loan officer can also recommend what steps can be taken to improve credit scores before shopping for a condo.
Maximize Qualifying Income
Self-employed house hunters should show as much taxable income as possible, which means going easy on deductions and depreciation when filing tax returns. Something else underwriters will zero in on is steady income. An attorney who received more than $120,000 over two payments for a single case worked in a year may need to have a CPA explain how he or she was able to run the practice the rest of the time, because underwriters don’t generally consider windfall revenue to be qualifying income.
Self-employed people know the immeasurable value of working with professionals who are reliable, honest, and experienced in their industries. Buying a home is no different, so when you’re getting ready to finance your home purchase, don’t forget how crucial it is to work with realtors who know the ins and outs of financing downtown San Diego real estate. The professionals at 92101 Urban Living will be your trustworthy guides through every step of the home-buying process. Call one of our friendly agents today at 619-649-0368.