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How to Qualify for a Mortgage Without a Steady Paycheck

This article was written by in Real Estate and Home. 10 comments.


It’s been almost nine months since I had a regular paycheck. Last year around this time, I was starting to make my plans for leaving my day job. One of my concerns was the possibility of qualifying for a mortgage with only self-employment income. Banks are still tight with their lending. Although mortgage rates are historically low, you have to be a special borrower to qualify. If your income isn’t shown on a W-2, and if there’s any risk that prevents you from showing a steady income from month to month, you won’t receive any preferential treatment.

I’ve been working with my accountant to make sure this year’s business income will be shown on a W-2, having my business pay me a salary. The higher the salary, the more tax I’ll need to pay in the short-term, but it may be a small price to pay for qualifying for a lower mortgage interest rate, assuming I qualify at all. In an ideal world, I wouldn’t need a mortgage, but that’s not exactly a guaranteed assumption. I’d rather take the conservative approach and assume I’ll need or want a mortgage when I break down and buy a house.

DollarFor most freelancers, income is often shown on 1099 forms, not W-2 forms. 1099 income is viewed skeptically by banks.

Here are some suggestions for increasing the chances of qualifying for a mortgage when income is erratic or risky.

  • Clean up your finances. Pay off credit card debt, get rid of car loans, and put money away into savings accounts. Always pay your bills on time and make sure you’re well versed in your financial condition. Being able to show you’re in control of your finances can help.
  • Improve your credit. By cleaning up your finances, you should be improving your credit score over time. Look into some of the details that you know go into a credit score, like your utilization ratio and the length of your credit history. Make changes to maximize the positive aspects of credit that will increase your credit score. Don’t forget to check your credit score as you go through this process.
  • Gather your documentation. The more proof you have, the more of a chance a bank will be willing to lend you money. At minimum, you should have your 1099 forms and your 1040 income tax returns. Any bank or brokerage statements that show you have substantial assets will help. Of course, this only helps if you do have substantial assets. (See the first point.) Any other documentation you have that indicates you will have the wherewithal to cover your monthly mortgage payments won’t hurt. Have a profit and loss statement ready for each of the last three years to coincide with your tax documentation.
  • Shop around. You may not have much luck with the larger banks. They want low-risk borrowers, and because they have so many branches and are so well known, the largest banks can afford to be very selective. Look online for the best mortgage interest rates as a starting point, but don’t forget bout local banks and credit unions.

Avoid these headaches by buying a house with cash. If you save diligently, or if you have an incredibly successful freelance career or your own business, you might be able to pull off this feat. It’s a good way to “stick it” to the banks. You lose the benefit (and risk) of leverage, but that may not be important to you.

Photo: Images_of_Money

Published or updated August 29, 2011. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes, also known as Flexo, is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about him and follow Luke Landes on Twitter. View all articles by .

{ 10 comments… read them below or add one }

avatar shellye ♦107 (Cent)

Great post, Flexo! I wrote a similar article for work recently but didn’t include tips for self-employed people like you and others who may not get a traditional W-2. Your point about shopping around is a good one; not only can you often get a better deal through a small bank or credit union, but mortgage brokers are equally desirous of your business and can do a lot of the legwork involved in shopping for the best rate.

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avatar krantcents

Banks also like a history (2 or 3 years) of income history particularly when you are self employed. They are looking for an assurance that the level of income you present will continue.

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avatar wylerassociate ♦906 (Dime)

I thought your 4th point was good because there are people that prefer to have their savings/checking accounts, credit card, mortgages all with 1 bank instead of doing research. There’s no way that I would ever try & qualify for a mortgage without a steady day job.

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avatar Ceecee ♦796 (Dime)

The tips are good for anyone in any situation. To buy a house with cash is quite a feat, unless you are selling a larger house and downsizing, maybe……or buying in a very depressed area.

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avatar WealthiHer

It’s not possible, those with good credit and steady income can barely get approved let alone someone without those things in place.

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avatar lynn ♦155 (Cent)

Although the article has valid points, I agree with Wealthiher.

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avatar Joshua Heckathorn

Make sure your business has at least 2 full years of its own tax returns before applying for a mortgage as well. Otherwise, some lenders may not even count the W2 salary that you pay yourself from the business. I’ve run into that issue myself before, and it can be quite frustrating when you have a successful business and 2 years of personal tax returns but the lender still won’t take into consideration your salary because the business is too “new”.

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avatar qixx ♦1,825 (Half-Dollar)

If all else fails, come to me for your mortgage. I now offer secure mortgages. It operates similar to a secure credit card. Your loan limit will be set equal to the amount you have in my reserves. I even wave any “bank fees” for those that qualify for a $700,000+ loan. For a smaller loan i charge a $1000 processing fee. The only real down sides are: i only offer 5 year mortgages; and 1 late payment closes your account, pays off your remaining balance from your reserves, and charges a 10% of reserve remaining “early termination” fee.

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avatar Jacob Morgan

I’ve been going through this process for a while. I have my own corporation and I pay myself a salary which is reflected on a W2 at the end of the year.

The banks require you to declare your income to be “Self-Employed” if you own a majority of the business. They require that you have filed two years of tax returns and they will average the business tax return earnings together.

That means, if you have a loss in year one, year two may not help you much. This was my case and I am having to wait till January 2012 when I file my 3rd year tax returns so that I can show two years of positive business income.

Bottom line is, simply shifting income from 1099 to W2 will not work. If you’re self employed, you are scrutinized far more heavily and really have to have all items in order before going in to apply for your loan.

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avatar Jacob Morgan

Oh, and Flexo, I’m not really sure I understand what you mean by paying higher taxes through paying yourself a higher salary on a W2. You’re going to pay the same taxes regardless of if you pay yourself on a 1099 or on a W2. It all flows through to your personal tax return. The only exception to this is if you own a corporation, but now we’re getting into a topic that’s way beyond the scope of this article.

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