March 17th, 2017
According to the Bureau of Labor Statistics' last Spotlight on Statistics from March 2016, 15 million people, or 10.1 percent of all U.S. workers, were self-employed in 2015.1 While that figure is over a year old, it's still safe to say that there are a number of independent workers and small business owners out there - and some of them want you to help them find a house.
Self-employment offers them many benefits - but if they aren't organized with their finances, taxes, etc., one plus won't be a smooth ride to a mortgage. The difficulty rests in the "burden of proof" that the self-employed are under to show to lenders that their income and assets are sufficiently sound and, more importantly, consistent to merit the extension of home financing.
Especially now as we come into the home stretch of the 2017 tax season, the idea of keeping "everything administratively together" is uppermost in the minds of your self-employed prospective buyers. Here are a few things that they should keep in mind/have on hand when they are in the mortgage market.
Know the details: All of the buyer's business's "vital statistics" should be at their fingertips: business name as reported to the IRS, nature of the business, years of operation and how long the buyer has been the business owner.
Have the paper trail: Lenders will want to see two or more years of full tax returns, with all schedules, for all business conducted by the buyer. They will also ask for any W-2s or K1s, if applicable, and, at times, a profit/loss statement and balance sheets. Lenders may also request a Form 4506-T so that they can get a tax transcript from the IRS. The lender wants all of this documentation so that they can compare the reported income, in all of its forms, to ensure that the numbers add up. They also want to look at the money flowing in and out of the business in terms of expenses, deductions, etc., to determine the business's true annual financial "bottom line" for the reported periods. Additionally, a lender will also need bank statements to provide them with even more visibility into the buyer's financial life.
Follow the Boy Scout motto: "Be prepared"
As a self-employed business owner, your buyer should already be following financial reporting best practices - but that doesn't necessarily mean that they have all of the data and documents that a lender wants in one, tidy package. More than one mortgage has been held up or made more "pressurized" because a buyer had to scramble and dig for this paystub or that bank or tax record.
If you have a self-employed buyer, encourage them early on to "get it together" and be prepared for the mortgage process. When they are, it will help to reduce the headaches of getting mortgage financing and increase the overall enjoyment of the house hunting adventure.