How to Get a Mortgage with An Inconsistent Income

Getting a mortgage and looking for a new home is always a difficult process, especially when you’re self-employed or tend to work on a contract-to-contract basis and if you’re going through a divorce then the stress only multiplies. Luckily, your search for a mortgage doesn’t have to become a seperate ordeal as long as you utilize this checklist to get your ducks in a row before speaking with a mortgage lender.

Get your tax returns ready

The first thing you’ll want to do when searching for a new home as someone who is self-employed is to round up your last two years of tax returns. While someone with a more traditional form of employment would typically require just six months to a year’s worth of tax documents, folks who are self-employed are viewed as more of a financial risk by mortgage lenders. These documents will serve to demonstrate that you have a history of steady and stable income that will allow you to afford the mortgage payments on a home not only right away but also for the years to come.

After you provide your mortgage lender with these documents they will use your average income from both years to get a sense of how much money you bring in each year. This is the number that they will use to determine how much house you’re able to afford in your real estate market so if there’s a significant difference in the amount of money you’ve earned in one of the past couple of years be sure to explain why this happened (whether it be due to illness/injury, maternity leave, some other life change, etc.) so that they know this does not reflect how much you typically earn in a year. If you find yourself in this situation, also be prepared to provide additional tax documents to support your claim that this is not representative of normal circumstances.

In addition to these tax returns, small business owners could also be required to provide their mortgage broker with a profit and loss statement. This is to demonstrate that your business is profitable enough to be able to comfortably provide for your mortgage payments. You may be exempt from this, however, if you have been in business for five or more years and your past two tax returns show that your income has increased year over year.

Make sure your credit is good

Everyone knows that having good credit is one of the most important factors in qualifying for a mortgage but this is especially true for those who are self-employed. If you have yet to do so already, apply for a credit card and start using that for your day to day purchases. Be sure to not spend beyond your means as you’ll need to pay the credit card debt that you accrue at the end of the month in order to build credit. Also be sure not to use your personal credit card(s) to pay for any business expenses as this only serves to increase your personal debt, too much of which can hurt your chances of qualifying for a mortgage.

Limit your tax deductions

While it may seem appealing to write off as many of your expenses as possible on your taxes, try to reign in these write-offs as much as possible. This is because each expenditure that you write off actually serves to decrease your income (at least on paper). Before you quit cold turkey on tax deductions though, be sure to meet with both a mortgage officer and your tax preparer so that you can explain to them what size house you’re looking to purchase and you can learn how much income you’ll need to demonstrate in order to qualify for the necessary mortgage.

Keeping your home?

So far this information has applied primarily toward those shopping for a new home but what if you are keeping the house in which you and your former spouse called home? In that case, you’ll want to make sure that your name is the only one on the mortgage. To do this you’ll have to refinance the mortgage into your name, buying out their equity in the home in the process. This is accomplished by taking out the aforementioned amount of the home which they own and bundling that into the remaining mortgage you still owe.

Once you pay your spouse the mortgage will be entirely your responsibility. Before you do this, be sure to get your ex to agree to transfer the title to your name alone. A common way to do this is through a quitclaim deed. If you do not do this step then they will still own a portion of your home even though they are now no longer making any payments on it.

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