A lot of the things you took for granted when you worked as an employee are off the table after you’ve taken the plunge into self-employment. Unfortunately, one of the things you’ve given up is the ease with which you could demonstrate your income to a potential mortgage lender. This can become problematic when it’s time to document your income for a home loan. Fortunately, there are ways to work around this responsibly together with your accountant.
Traditionally, self-employed borrowers have been able to demonstrate their income by presenting tax returns and bank statements during the loan application process. This isn’t always possible, however, as the exact structure of small businesses obviously varies a great deal. Using your own personal income to qualify for a home loan can also be deemed problematic if you keep a large amount of your available capital tied up in the business you manage. If this is the case, you might have reasonably close access to large sums of money, yet be unable to demonstrate that availability through your own tax forms.
One popular option for self-employed home buyers who find themselves in this situation is the so-called “Alternative-document” loan. An Alt-document loan takes into account the difficulty that some business operators face in obtaining all of the documents requested for a conventional loan in a timely manner. These loans can sometimes process through more quickly than mortgages requiring more extensive documentation, but they come with a cost attached.
Whether or not a Alt-document loan is for you depends on multiple factors. Your net cash flow, total debt-to-income ratio, and even the type of industry you work in can make a difference in how easily you’re able to gather and present all of the requested verification documents. As always, when you’re looking into a home loan of any kind, it pays to meet with a broker who can walk you through the various options for lending to the self-employed. An experienced broker who takes the time to get to know your individual situation will be in a position to help you discriminate between a traditional and a Alt -document loan, assess the relative costs of each type, and make the right choice for yourself and your family.
