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Lending Tips for the Employed Borrower – Part 1


It is amazing how many of us are self-employed.  Being your own boss is wonderful for anyone who can deal with the ups and downs of a business economy. 

There are times when self-employment can be challenging, like when you are looking for a mortgage.  Given the complexity of this issue, I will cover it in two blogs.  For this first article, we will touch on some definitions of who is considered self-employed and what kinds of documents will be required to get a mortgage.  Be sure to check out the second article where I will get into some of the issues you may face in qualifying for a mortgage loan. 

Are You or Aren’t You?

If you own a contracting business, and that is your primary source of income, you are definitely self-employed.  However, lenders have a more complicated way of looking at what they call “qualifying income,” the income that will be used to repay the loan.  

If your income changes on a regular basis, you may be treated as self-employed.  While self-employed often means business owners, it can also apply to individuals who get income because they own a significant stake in a corporation.  It can apply to people paid on commission, or individuals who get a 1099 each year reporting their income to the government.  Believe it or not, even a retired person who lives off an annuity might have to show the promise of future income. 

What Do I Need to Qualify?

You will generally need to have been self-employed for two or more years.  Lenders will want to see a track record of steady earning success.  The underwriters will probably average your income over two or three years to determine what they consider your “qualifying income.”  Be aware that a sizable income dip during this time period could keep you from qualifying. 

Your profession is almost as important as your success.  You could have been the best buggy whip maker ever and still not have a good future income potential.  Lenders will look at the type of business you have and its future potential. 

What Documents Will I Need?

As with any loan, be prepared to hand over a lot of paper.  You will likely need at least two years worth of documents.  Here is just some of what you may have to provide:

  • U.S. Federal 1040 tax return
  • Schedule C (Business P&L)
  • Schedule D (Capital Gains & Losses)
  • Schedule E, Part II (Income or Loss from Partnerships)
  • Schedule K-1 1065 (Partner’s Share)
  • Schedule K-1 1120S (Shareholders’ Share)
  • Form 1065 (Partnership Return of Income)
  • Form 1120 (Corporate Income Tax Return)
  • Year-to-date Balance Sheet and P&L
  • Partnership Agreement

Don’t Feel Picked On

Yes, we know it is a lot of paperwork, but don’t feel picked on.  Employed borrowers are also digging through their shoebox of paper, and they still have to listen to a boss. 

In the second part of this article, I will discuss what lenders are looking for and how to present your best case for a loan.