Self-Employed Home Financing: Essential Tips & Advice

Despite the fact that it may be the largest financial transaction you will ever make, advancements in technology have made it easier than ever to pre-qualify and then to officially apply for a mortgage loan. When applying for a home loan, specific documentation such as income verification or asset verification is required (you can read this article to find all documents required throughout the home loan process). Don’t worry, we’re going to break down this piece of the process and dispel the myth that providing various types of income documentation is complicated.

Because a mortgage is a significant amount of money loaned, lenders want to make sure you can make those monthly payments and ultimately repay the loan, without the risk of missing payments, default or significant financial burden on the borrower. Income verification is a basic component of this, and your lender will want the paperwork to back it up. While different lenders may require different documentation, as do different loan products (think FHA and VA streamlines if you’re looking for fewer docs), you can consider the following as verifiable sources of income that will need official documents:

Employment income
Bonus, overtime and commission income
Second job or side hustle income
Retirement or Social Security income
Investment property and rental income
Dividend and interest income
Child Support, Alimony/Spousal Support, or Separate Maintenance Income
Foreign income
Self-employment income

Understanding the Verifiable Sources of Income When Getting a Mortgage

Employment Income

Some borrowers believe that you only need to provide your most recent paystub to show proof of income. Actually, it’s almost that simple; most lenders require copies of the last two pay stubs, as well as your last two years of W-2 statements. Together, these official documents provide a clear picture of your overall financial situation and the consistency of your regular earnings.

We’re living in the 2020’s, so paper is out. You can provide electronic copies of your pay stubs, and you can authorize your lender to obtain your federal tax returns directly from the IRS, which makes it easier on you. Programs such as the IRS’ Income Verification Express Services allow lenders to confirm the income of a borrower during the application process. Though lenders are looking for financial stability, this doesn’t mean there’s necessarily an issue if you have recently changed jobs or even industries in the past two years. In these cases, the lender may ask your new employer for a proof of income letter.

Bonus, Overtime, and Commission Income: To qualify, annual bonuses, overtime, or commissions require a proven history and future continuity. Submit W-2s from the past two years and recent pay stubs. For significant commission earnings, average income over two years from tax returns.

Second Job Income: A secondary job or side hustle can count if maintained for two years alongside your primary job, showing consistency and future income potential.

Retirement or Social Security Income: Pension or retirement income needs recent statements or checks confirming deposit into your account. Verification ensures income continues for at least three years, backed by an award letter or direct verification.

Rental Income from Investment Property: Qualify with rental income by providing the latest federal tax return, focusing on Schedule E for supplemental income. Show one- to two-year history of rental income continuity.

Dividend and Interest Income: Lenders verify dividend and interest income using two years of tax returns to calculate an average. Proof of asset ownership required, such as current financial statements or brokerage records.

Child Support, Alimony/Spousal Support, or Separate Maintenance Income: Validated by court orders or divorce decrees, showing consistent receipt for the previous six months to support mortgage applications.

Foreign-Earned Income: Foreign income may qualify based on documentation in your tax returns. Employed income requires recent pay stubs and two years of tax returns, adapting to the type of income received.

Self-Employment Income: Self-employed individuals should provide federal tax returns for the past two years, both personal and business. Lenders focus on Schedule C for income and loss details, along with expenses and deductions. Additional documents like year-to-date profit and loss statements and business bank statements may be required to verify current business operations.

Debt-to-Income Ratio (DTI): DTI is crucial in mortgage qualification, calculated by dividing total monthly recurring debt by monthly gross income. Lenders generally prefer a DTI of less than 36%, with no more than 28% allocated to mortgage payments. However, DTI requirements vary by lender and loan type.

Mortgage Income Calculator Benefits: Utilizing a Mortgage Income Calculator helps assess affordability based on specific income sources. AmeriSave offers a Home Affordability Calculator for estimating mortgage affordability using current income and debt payments.

Conclusion: Prepare income documentation thoroughly and consult with an AmeriSave mortgage banker to align with lender requirements. This ensures a smoother mortgage application process than expected.