Getting a Home Loan in Illinois When You’re Self-Employed
Since the 2008 financial crisis and the real estate bubble that resulted, banks have instituted tighter eligibility rules, making it more difficult for virtually everyone to borrow money to buy a home. While it has always been difficult for self-employed home loan borrowers in Illinois, it is arguably even more difficult today.
There are a number of advantages to being self-employed. You are your own boss. You get to set your own hours and determine your own income. But when it comes time to borrow money to finance the purchase of a new home, being self-employed is generally not an advantage.
Income is Key
The reason? Because it’s difficult for banks to verify your income. To qualify for a loan, self-employed borrowers generally need to have been self-employed for at least two years and prove this with tax returns provided by the IRS. (Most lenders will ask you to sign Form 4506 giving them the right to request your returns directly from the IRS.)
Most banks will also require a year-to-date financial statement for the current year prepared by a CPA. The bank will average the income shown on your tax returns for those two years. If you earned $40,000 in the first year and $80,000 in the second, the lender will say your income is $60,000—even if you are on track to earn even more this year.
Other home loan requirements for self-employed borrowers are more stringent as well. Most self-employed borrowers need excellent credit scores. And it’s usually a good idea to make a higher down payment. While some borrowers can get by with putting down as little as 10% of the purchase price, a self-employed borrower should probably consider putting down 25%, 30% or more to lower the risk the lender is taking in making the loan.
Getting the Illinois Home Loan You Need
If you are self-employed and having trouble qualifying for a home loan, there are steps you can take to improve your eligibility.
-Have only your spouse or partner apply for the loan. As long as he or she has a job that provides a W-2, has good credit and a stable income, this may make the entire process easier.
-Get a cosigner. Perhaps a parent or other family member will cosign your loan to minimize the lender’s risk.
-Consider the alternatives. Some lenders will loan you money at a higher interest rate. Others still offer an alternative that was popular before the meltdown, a no doc or stated income loan. If you can find such a lender, you simply state your income without having to prove it. If you choose this option, your credit needs to be nearly perfect and you need assets in the bank as a back-up. Unfortunately, these loans are rarely available today.
-Pay more in taxes. Most self-employed taxpayers try to minimize their taxable income to keep their tax bill low. But since your business’ after-tax income is a key figure for lenders, you can improve your eligibility for a loan by forgoing some deductions. You will pay more in taxes, but should also be eligible for a larger loan.
Get Your Dream Home
If you are self-employed, getting a home loan in Illinois isn’t impossible. But it is more difficult. Your borrowing options are more limited, as is your ability to shop around for low interest rates. But for most people, the ability to afford the home of their dreams is what matters most. While you may have to jump through a few more hoops, a little perseverance means you will ultimately get the loan you need to make the purchase.
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