How to Get a Mortgage If You’re Self Employed in NYC

Getting a mortgage can be a relatively straightforward process when you have a set salary. But how do you get a mortgage if you’re self employed, especially in a place like NYC? 

Contrary to popular belief (and fears), self employed folks get mortgages all the time. So if that’s your concern, you can set it aside and breathe a sigh of relief. 

Instead, as a self employed person, you need to be focused on what you need to do to make getting a mortgage happen. 

I spoke with mortgage professional Jason Prussian of Wells Fargo Bank (NMLSR ID 40035) to help you understand what self employed folks in NYC need to do if they want to get financing. 

Focus on Documentation

By far, the most important thing you need in order to obtain a mortgage as a self employed individual is clear documentation of your income. And it’s going to be quite a bit more than for a salaried employee. 

Why do banks need so much more information? 

According to Jason, “The reason for the additional documentation for self employed borrowers is due to lenders needing to determine the actual ‘qualifying income’ for the loan.” 

Qualifying income is not the same as gross income. Gross income is income before expenses. Lenders, however, use your income after subtracting expenses to determine your qualifying income. For example, if your gross income is $100,000 but your expenses were $35,000 that year, then your qualifying income is $65,000, not $100,000. That’s a big difference. 

Types of Documentation Needed

What kinds of documents do you need, then? 

Tax returns are the primary document that lenders will request. Underwriters use personal tax returns and business tax returns to determine qualifying income.

Profit and loss statements (“P&L”) and balance sheets are also important. According to Jason, “Mortgage lenders often need year to date profit and loss statements and balance sheets because the income we have on the tax returns isn’t current. So in order to understand the current income from the last date taxes were filed, we use the P&L statement along with a balance sheet.”

Additional documents which are helpful include information about accounts receivable and business bank account statements. 

A quick note here about business bank accounts. Jason advises that if you plan on using assets that are held in a business account for your down payment or closing costs, then you need to be prepared to supply more documents. Underwriters will typically request a letter from your accountant that indicates you have access to the funds and use of these funds would have no impact on your business.

Image of pre war coops in New York City. Left side features a red brick facade and the right side features a white brick facade.

Income Track Record

Using the documents noted above, you’ll need to show that you’ve been able to earn income consistently as a self employed individual. 

Many banks want to see at least 2 years of income history in order to approve you for a loan. According to Jason, most lenders “would want to look at your history to see if the income is increasing. We would then use a 2 year average of that.  But if your income has declined over two years, we would only use the most recent year. We’d also want to understand if this decline is a sign of a trend. “

There are some lenders who might consider at least 1 year of income history to be sufficient. But only if the rest of your financial picture is very strong. For example, they may consider one year of income if you’re planning on doing a large down payment. They might also consider it if you have significant liquid assets. 

If you just got started with your business or freelancing and have less than 1 year of income history, then it may be extremely difficult for you to obtain a loan. So if that’s your situation, you may have to hold tight and wait just a bit longer before you pursue home ownership. 

Letter from Your Certified Public Accountant 

One very helpful tool to help you qualify for a mortgage is a letter from your certified public accountant (CPA). A CPA who’s been working with you for years and understands your income and your business is well positioned to explain your situation. They’re also considered a trustworthy source for projections about your future income. 

If you’re not yet ready to buy, now’s a great time to establish a relationship with an accountant so that they can help you in the future. 

***

Have more questions about mortgage lending? Feel free to contact Jason Prussian at jason.c.prussian@wellsfargo.com.

And if you have additional questions about the home buying process overall, feel free to contact me!

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