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The self-employed New Yorker's guide to getting a mortgage

Lenders will compare your business account with your profit and loss statement and the most recent tax filings when considering a loan.

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When you are your own boss, getting a mortgage means you need to jump through more hoops than other buyers. Now, because of the pandemic and the disruption many companies have suffered—it’s harder for self-employed business owners as well as 1099 contractors to get a loan.

You typically need to have been working for yourself for at least two years and have a healthy balance among your business and personal bank accounts before you'll be able to get bank financing. As a result of the pandemic, your profits and losses now will face additional scrutiny and lenders will want to see documentation that money is going into your business account at a consistent rate. 

Here's what you'll need in order to get a mortgage:

A pre-approval letter

Ami Rosen, a home lending officer with Citi, says his most important advice to anyone who is self-employed and wants to buy is to get an "iron-clad pre-approval letter," indicating a bank has thoroughly reviewed your finances.

This is important even before you go apartment hunting, says Brittney Baldwin, vice president of National Cooperative Bank (and a Brick Underground sponsor), "as it may show you what other information may be required during the loan process."

Evidence of two years of self employment

To show a consistent income, lenders like NCB and Citi recommend having two, full years of self-employment income. Rosen says with one year or less of self-employment, it's impossible to gauge what your income will look like, especially in these uncertain times. 

"If you are leaving your job at a hedge fund or medical practice to start out on your own we are not going to take into account any of your previous income unless we see a proven track record of making money on your own," he says.

During the gap between the beginning of the year and the tax filing deadline in April, lenders will want profit and loss statements for the first part of the year and supporting bank statements. Business owners technically can file their tax returns in September or October says Jacqueline Frank, vice president of mortgage lending at Guaranteed Rateand if they need a mortgage "they need to file earlier in the year,” she says.

Business bank statements

Your most recent business bank statements will confirm your monthly deposits and expenses and must match your tax filings, and your profit and loss statement for the year to date. 

Providing a business bank statement is a new requirement ushered in during the pandemic, Frank says. As an example, she says a client of hers who owned a dance studio was forced to close at the beginning of the pandemic and it wasn’t until she began offering online dance classes that revenue picked back up. Her loan could not be approved until three months of business bank statements showed the studio owner could again support her salary and payroll.

Lenders will compare your business bank statements, with your profit and loss statement and the most recent tax filings when considering a loan. 

Frank points out that for business owners with seasonal businesses, like landscapers for example, it can be very challenging.

If you have no business activity, you won’t be able to close until you prove that you have cash coming in. “This can be done with current business contracts in place or some other form of proof of activity,” Rosen says. 

Balanced personal accounts

An important part of getting a mortgage is being able to show consistent capital gains income. This is nothing new. Self-employed New Yorkers are able to write off losses, carrying costs, and repairs against their business income, but if you write off too much it ends up reflecting a negative income, and that will impact your chances of getting a mortgage. 

"If you are showing negative income and we can’t add back certain portions of the income, you are not going to qualify for any mortgage, let alone a million-dollar mortgage, so it’s very important to be upfront before you make an offer," Rosen says.

You'll also need to consider how you use money from your business account. Rosen says if the down payment is coming out of a business account the lender is going to want to know whether that affects your business. "In those cases, we’ll want certified public accountant letters stating the use of business funds will not negatively impact the business," he says. 

The right lender

There are so many different types of self-employment, it's worth finding someone within the bank you are using who is well versed in your type of self employment. "No two snowflakes are alike and you have to look at each person individually," Rosen says. 

A co-signatory option

You might want to consider having a co-signatory—in mortgage speak this is a non-occupant co-borrower. Rosen says this option is often a route for young people who are starting out, don't have multiple years of employment behind them and have a parent who has a strong financial profile who can help.

The co-signatory "can use their income and assets to help qualify a borrower that might not otherwise get a loan," Rosen says. 

Exceptions for those with high net worth

If you are self-employed and are in the fortunate position of having lots of money in the bank, you may be able to get a mortgage even if your business shows losses. Rosen says a bank can calculate income by asset depletion.

"We can create an income figure from your asset portfolio. The ultra high net-worth who are self-employed can qualify, where others with lesser liquid assets might not be able to," he says.