Last Updated: February 16, 2024, 1:14 pm by TRUiC Team

Mortgage Basics for Self Employed LLC Owners

Securing a mortgage can be difficult for self-employed individuals who lack a W-2 and do not have an obvious employer. Mortgage lenders tend to rely on an applicant's employer to assess financial risk and better understand an applicant’s income, employment history, and likelihood of sustaining the needed income to pay for the mortgage. 

Since self-employed borrowers do not have an employer, qualifying for a mortgage as an LLC owner or freelance entrepreneur often requires more planning and documentation. This guide will describe how LLC owners can qualify for a mortgage and find the best mortgage for their new home.

Recommended: Giniel Financial Group specializes in helping LLC owners and self-employed entrepreneurs get mortgages for their homes. 

Financial planner helping a couple with mortgage information.

Mortgage Basics

A mortgage is a loan used to purchase a house. With a mortgage, the collateral for the loan is the house itself, and mortgages typically are repaid over 15, 20, or 30 years. Repayment includes money borrowed plus interest. 

To secure a mortgage loan, you will need to apply through a mortgage lender. The type of mortgage you receive will ultimately depend on your individual circumstances.

Why Obtaining a Mortgage Can Be More Challenging for LLC Owners

Even if they have a thriving business, self-employed business owners face additional challenges when qualifying for a mortgage. An LLC owner’s lack of a transparent W-2 income and their incentive to reduce their taxable income create additional hurdles when trying to obtain a mortgage.

Lack of Easily Identifiable Income

Since business profits and losses of LLCs and self-employed individuals pass through to the individual, self-employed individuals lack a standard W-2 form. In general, all company employees receive a W-2 from their employer showing their annual income. Mortgage lenders use W-2 forms to assess how much money an individual can expect to bring in each year. 

Even if you make a significant amount of money through your business, you will need to provide additional documentation to prove that your business is stable and can be expected to provide you with sufficient income to pay your mortgage. 

Business Expenses

Most self-employed individuals are incentivized to deduct their business costs in order to lower their taxable income. While this results in paying less in taxes overall, it also decreases your annual income listed on your personal tax returns. 

Although your net take-home pay may be comparable to someone with a higher salary, (which pays significantly more in taxes), your taxable income will be lower. This may cause lenders to question if you make enough money to pay off a mortgage.

Qualifying for a Mortgage Loan as an LLC Owner

Mortgage lenders use the following pieces of information to assess you as a borrower:

  • Credit score
  • Debt
  • Personal assets
  • Income

Self-employed LLC owners follow the same mortgage approval process as anyone else, and mortgage lenders tend to categorize LLC owners and self-employed individuals as riskier borrowers. Therefore, self-employed individuals will need to jump through additional hoops to prove they are qualified mortgage candidates. 

A self-employed individual can improve their chances of qualifying for a mortgage by performing the following actions:

Increase Your Credit Score

A higher credit score will result in lower interest rates on your mortgage. The easiest way to raise your credit score is by increasing your credit limit and by regularly paying your monthly credit card bills on time.

Improve Your Debt-to-Income Ratio

Your debt-to-income ratio measures how much monthly debt you have compared to your monthly income. Lenders typically want this number to be below 36%, meaning your monthly debt is less than 36% of your monthly income. You can improve your debt-to-income ratio by decreasing your monthly debt or raising your monthly income.

You may also want to consider avoiding additional monthly debt and paying off any credit card debt or car loans to help improve your debt-to-income ratio and potentially qualify for a better mortgage loan.

Put Extra Cash in the Bank

Having large sums of money in the bank that can easily be accessed helps assure lenders that you will be able to make your mortgage payment if your business faces economic hardship.

Make a Large Down Payment

A large down payment means you won’t need to borrow as much money, and since you will start off with more equity in the house, this is viewed as less risky for a lender. If you are having difficulties qualifying for a mortgage, consider offering to pay a larger down payment.

Provide Income and Self-Employment Documentation

Lenders will want documentation showing a stable, consistent income to help assure them that you can make your mortgage payments. You will want to provide lenders with your tax returns, a list of assets, and a list of any additional sources of income. 

Gather Your Personal and Corporate Taxes

Lenders will want you to compile the last two years of your personal taxes and business taxes into a PDF form. You will need to upload all pages of your federal tax returns from the last two years. State tax returns are not necessary.

  • Personal Income Tax Returns: Your personal income taxes should be filed annually using Form 1040. If you have an LLC or work as a freelance sole proprietor, your business’s taxes will pass through to you and appear on your personal tax return under Schedule C.
  • Corporate Taxes: You will need to provide corporate returns for any corporation you have a 25% interest in. LLCs and other pass-through business entities do not pay corporate taxes since the business’s profits and losses pass through to the owners.

Gather Business Documentation

Be sure your business’s books are current and accurate, and gather the following documents pertaining to your business:

  • Business bank statements
  • Profit and loss statements
  • Balance sheets and additional financials
  • Business debts and monthly payments

Recommended: Consult with a mortgage lender at Giniel Financial Group to better understand how you can become a better mortgage candidate.

Steps to Take Before Applying for a Mortgage as an LLC Owner

Once you’ve gathered all of the documents needed to show your self-employment history and your income, you will want to do the following before applying for a mortgage:

Settle Any Payments You Owe the IRS

If you owe the IRS money, find the bank statement or canceled check showing that the IRS has been paid. In the event that you owe the IRS and cannot pay in full, you will need to set up a payment plan with the IRS and provide documentation that you have made three or more payments using your checking account. 

Gather Bank Statements

At a minimum, you will want to have bank statements from the last two months. These statements must not have any notice of nonsufficient funds. 

Documents for Ownership of Multiple Properties

If you own multiple properties, your lender will need documentation showing your property taxes, mortgage statement, and insurance associated with all of these properties.

Pitfalls to Avoid Before Applying for a Mortgage as an LLC Owner

Since self-employed individuals are already seen as riskier borrowers, LLC owners and other self-employed individuals will want to avoid the following:

Mixing Business and Personal Finances

Mixing business and personal finances puts a business owner’s personal assets at risk and jeopardizes the legal separation between a business and its owner, a process known as piercing the corporate veil. In general, this is not only bad for your business, but this signals to mortgage lenders that you may not be a competent business owner. Ensure that you have a separate checking business banking account, and do not mix this with your personal funds.

Writing Off Too Much as Business Expenses

To qualify for a mortgage, you need to be able to show an income. Therefore, if you write off too many business expenses and have a very low taxable income or show a net loss, a lender will likely flag this as insufficient income.

Changing Banks

You need your bank statements to show stability. Having a bank history with the same financial institution can show that you are reliable and stable.

Ignoring Your Credit and/or Making Big Purchases on Credit

Avoid being late on any of your credit card payments. You need a credit history showing you can manage your finances. Additionally, many lenders will evaluate your debt-to-income ratio, which means purchasing big-ticket items with credit, like furniture, makes it harder to get approval for a mortgage.

Buying a New Car, Co-Signing a Loan, or Taking on Any Additional Monthly Debt

Borrowers should try to lower their debt-to-income ratio. Do not buy a new car where you will take on debt and have to make monthly payments, as this will increase your monthly debt. 

Furthermore, do not co-sign a new loan. Even if you don’t make any of the loan payments, you will legally be responsible for that loan, and this will doubt your monthly debt.

Making Sporadic, Large Deposits 

Sporadically, depositing large sums of money into an account is a red flag for lenders. Lenders prefer that you leave the money you will use as a down payment in your bank account for at least two months.

Lying on Your Loan Application

Lying about debts, liabilities, or income is fraud. 

Forgetting About the Closing Cost

Typically, a home buyer will have to pay part of the closing costs — have that money ready to go when the time comes.

Ready to Get a Mortgage?

While getting a mortgage may be more challenging for self-employed business owners, it is far from impossible. By staying organized and diligent, you can improve your chances of assuring lenders that you are a great candidate for a mortgage. Be sure to follow the steps outlined in this guide to help ensure you qualify for more favorable rates and consider working with a LLC-friendly mortgage group like Giniel Financial Group to help guide you through the mortgage process and answer any questions specific to self-employed individuals.

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