Own your own biz? Get these ducks in a row, get a mortgage.
1. Flesh out your credit score.
Depending on the loan type you intend to qualify for you will need to meet the minimum credit score standards. Federal Housing Administration loans (FHA) typically require at least a minimum 620 middle credit score whereas conventional loans typically require a minimum 660 middle credit score. It is always a good idea to check your credit report prior to entering in a contract to buy a house and correct any errors you find on your credit report.
2. Build a down payment.
FHA requires a minimum 3.5% down and conventional financing requires a minimum 5% down payment. Although gift funds are acceptable for some or all of a down payment, using your own funds will make you a better risk. In either case, a larger the down payment may be considered a compensating factor.
3. Show stable or increasing income.
Lenders will use your last 2 years of tax returns to calculate your income. They will review your tax schedules and add back depreciation, amortization/casualty loss, and depletion to your net profit or loss. The lender will also ask for a year-to-date profit and loss statement to verify your income is stable and not decreasing. If your income is decreasing, a lender will likely use the worst case scenario as your qualifying income instead of your last 2 years’ average income.
4. Contribute to reserves.
Most loans require 2 months or less of mortgage payments (principal & interest, taxes, insurance, and private mortgage insurance) left in the bank at the time of closing. The greater amount of mortgage payment reserves you have in your bank the better risk you will be in the eyes of the lender.
5. Organize business and personal debts.
If you have debts that are paid directly through your business, you must have separate business bank account to be able to prove with debts are paid through the business, thereby not counting them in your personal debt ratio. Lenders will require a copy of the last 12 months of cancelled checks to verify the debt is being paid directly out of the business account. If you intend to buy a house avoid any new business debt for the 12 month period prior to purchasing a house. New business debt (where you cannot provide 12 months of cancelled checks from your business account) will likely be counted as personal debts by your lender.
6. Make sure your business is recognized by your state.
Lenders will need to verify you have officially been in business for at least 2 years. A business license is typically required but a letter from your CPA is often accepted.
Full article: http://www.lender411.com/getting-a-mortgage-while-self-employed/