The Definitive Guide to Mortgages in Oregon for Self-Employed Homebuyers

Working for yourself and having a home – these are two of the major dreams held by many people. Those who achieved the dream of being self-employed and running their own business might find that their dream of homeownership might be a bit harder to reach, however. There are several hurdles that a self-employed individual has to overcome before even being qualified for a mortgage, ones that traditionally employed people don’t have to go through. But you shouldn’t let that idea discourage you.

There is a path to homeownership that’s accessible to the self-employed homebuyer. You just have to be ready with all the necessary papers.

MORTGAGE-RELATED CHALLENGES FACED BY SELF-EMPLOYED HOMEBUYERS

First of all, what is a self-employed individual?

A self-employed individual is anyone who earns their income from a full-time or part-time business they own and run as a sole proprietor or as an independent contractor (or a freelancer). In tax terms, that would make you a 1099 employee or a person that reports their income to the IRS on a 1099 tax form. Unlike the regularly employed, you do not earn a consistent salary from an employer. Your salary is likely to be variable (or even volatile) depending on how many clients and projects you have and how much you earn from each one.

Moreover, your earnings are not subject to a withholding tax. Regular employees have their employers set aside a portion of their salary as withholding tax, which is then paid to the IRS. As a self-employed individual, you are responsible for handling this yourself.

Because of your status and your variable income, you may encounter the following challenges when you apply for a mortgage:

• If you take advantage of tax deductions and write-offs for your business, you might end up showing a lower net income, which might cause banks and lenders to conclude that you are not qualified for a higher mortgage.
• The documentation you have available may not be enough. Lenders generally look for pay stubs and W-2 forms from applicants.
• You’ll need to show proof that your business generates enough revenue to support your home purchase and loan payments.

While the process for self-employed homebuyers sounds a bit more complicated, both the regularly employed and the self-employed need to meet the same requirements.

• A self-employed homebuyer has to prove that they are capable of paying off their mortgage
• A self-employed homebuyer has to prove that they have a good credit history
• A self-employed homebuyer has to prove that their business is stable enough to provide them with sufficient income

TYPES OF MORTGAGES A SELF-EMPLOYED HOMEBUYER CAN APPLY FOR

Fortunately, there are many types of mortgages that you can go for as a self-employed homebuyer. Here are some of them:

1. Conventional Loans

These are available to self-employed homebuyers as well but it’s reassuring to know that there are other loan options you can apply for should a conventional loan be unavailable to you.

2. Bank Statement Loan

A bank statement loan is probably the easiest type of loan to apply for. You won’t need to submit tax returns and other documents to prove your income; your bank statements will suffice. This generally requires you to have a two-year record of self-employment. Note, however, that a bank statement loan is a non-qualified mortgage, without many consumer protections in place, and the interest rates will be higher because of the greater risk involved.

3. Joint Mortgage

In this setup, you and a co-borrower who is a W-2 employee are involved. A joint mortgage can include up to three people, and your co-borrower/s should have a good credit score and a low debt-to-income ratio. If one of you is unable to make payments, the other person will have to cover the costs.

4. Government-backed Mortgages

The requirements are less strict. For example:

• 1. FHA loans, which are insured by the Federal Housing Administration, require a minimum credit score of 580, a 3.5% down payment, and a self-employment history of two years.
  2. USDA home loans are backed by the US Department of Agriculture and don’t require a down payment. They do need to see that you’ve been self-employed for two years through your income tax returns.

WHAT LENDERS NEED FROM SELF-EMPLOYED BORROWERS

Aside from showing a high credit score and a good debt-to-income ratio, which are typically required for traditional employees, self-employed individuals have to provide more proof of their ability to pay off a loan, which is why you’ll need to be ready with a different set of documents.

1. Business License, Insurance, Certificate of Operation

Instead of furnishing your lender with proof of employment, you instead have to provide a copy of your business license, business insurance, and a letter from a CPA that certifies that you have been in business for at least two years. The length of time is important, as it indicates just how stable your business is.

2. Profit-and-loss Statements, Income Tax Returns, Bank Statements

You also have to provide profit-and-loss statements, two years of federal income tax returns, and business bank statements from the past six months. Alternatively, you can also provide documentation of your various income streams, as well as letters from current clients, a certified public accountant, and even a DBA (“Doing Business As”).

3. Proof of Continuous Operation

If you’ve been self-employed for less than two years, you can still apply for a mortgage. You simply have to show proof that your business has been operating continuously for 12 months, and you can even show evidence of previous employment. It’s better if your income from that previous job is about the same or even larger than your current income.

After all your preparations, if you’re still worried about being turned down for a mortgage, it’s time to reassess your strategy and make a few important changes.

HOW TO QUALIFY AS A SELF-EMPLOYED MORTGAGE CANDIDATE

Getting a mortgage may be a little more difficult for a self-employed homebuyer, but you can up your chances of being approved for a mortgage by doing the following:

1. Improve Your Debt-to-income Ratio

Debt-to-income ratio is the amount of debt you have versus the total remaining incoming you have left over each month. Ideally, your debt-to-income ratio should be below 45%, but lenders want to see this value at 36%. Anything higher than this and lenders will assume that you won’t have enough money available to pay off your mortgage every month.

You can improve your debt-to-income ratio by:

• Paying off more of your loans and debt, including your credit cards, every month.
• Having your interest rate lowered or extending the duration of your loan. Note that the last method will lower your monthly payments, but you will have to pay a higher interest rate as a result. The overall goal is to make sure that you start paying less on any debt.
• Taking steps to reduce your expenses.

2. Have a Solid Self-Employment Track Record

Ideally, you should have been carefully tracking the progress of your business, everything from when it started, its earnings and expenses throughout the years, a list of your clients, and more. This shows the history of your business and establishes how long it’s been operating and how profitable it’s been, which also shows its future potential. A self-employment track record will show your lenders that your business is thriving and can be expected to continue growing over time, thus boosting your income and making you much more attractive as a candidate for a mortgage.

3. Boost Your Credit Score

Having a good credit score is always desirable, as it shows your capability to pay off debt and how responsible you are with money. It even increases your chances of getting lower mortgage rates. The ideal credit score is 620 for aspiring homebuyers.

You can boost your credit score by, among others:

• Having a near-spotless credit history
• Making payments on time
• Diversifying your credit

4. Offer a Large Down Payment

This is not a special requirement for self-employed individuals, but it will certainly help your case. A large down payment shows that you are capable of saving money both for your property purchase and for times when business is slow.

5. Have Considerable Cash Reserves on Hand

Lenders are aware that your earnings as a self-employed individual can depend on the season or the number of clients. If you have significant cash reserves, then that’s a few points in your favor as it shows the lenders that you will be able to make your next few mortgage payments.

6. Organize Your Documentation

And keep it all updated, too. You want to show proof of your business’s existence from its inception to the present day, and you want it all arranged in order to make it easier for the lenders to evaluate.

All these steps will significantly enhance your stock as a self-employed homebuyer, setting you up in a good spot for your home purchase in Oregon.

Read More: How to Get Your Mortgage Approved

WHERE TO PURCHASE A HOME IN OREGON

With Oregon’s natural beauty, vibrant cultural hubs, and business-friendly climate (it ranked #18 in 2022 among the country’s top states for business), self-employed homebuyers are likely to find themselves keen on exploring what the state has to offer them and their burgeoning companies.

Small businesses make up a large chunk of companies in Oregon, accounting for 99.4% of all businesses in the state. They also employ 871,241 people, constituting 54.6% of the workforce of the whole state. Thus, the self-employed will find themselves in good company among Oregonians.

Aside from finding that Oregon is good for business, self-employed individuals will love their ready access to the great outdoors, living among diverse communities, and enjoying a cost of living that’s lower than that of the neighboring state of California.

These are just a few reasons why Oregon is a popular place to move to. Southern Oregon in particular is an idyllic location for growing families and those looking for someplace less stressful to call home. It has a rural vibe, towns with plenty of personality, and a fairly low cost of living compared with the rest of the state.

Ashland is a good place to live in Southern Oregon.  A college town with a lively arts and music scene, Ashland has an interesting mix of homes, from condos to townhomes to Craftsman homes, and multimillion-dollar estates. Living here brings you close to numerous activities and conveniences.

Medford is another good city to move to in Southern Oregon. Here, the cost of living is $37,266 a year, lower than in other parts of Oregon and the US. As the county seat of Jackson County, Medford is a bustling economic hub, yet it achieves a good balance with the stunning landscapes in the area, which make it  one of the most scenic cities in the Pacific Northwest.

Whichever town or city in Oregon you choose, the important thing to remember is that you choose a location that suits you and your family’s needs, presents the right opportunities, and is well within your budget. If you’re having a hard time figuring out where to purchase a home in Oregon, what with all the incredible communities here, you may find the process a lot easier when you work with a Realtor who understands your needs.

WHY CHOOSE MARIE DONOVAN AS YOUR TRUSTED REALTOR

When trying to find the right Realtor who will help you in your search for a home, you want someone who not only has extensive experience in the field and vast knowledge of the market and the area, but also has integrity and diligence to make sure that you find only the properties that best match your standards.

Marie Donovan makes sure that at the heart of every transaction with a client is respect  – respect for a client’s time and needs. We make every effort to understand your requirements and aim to deliver the results you want at the soonest possible time.

We’d love to hear from you. Let us help you get started on your way toward owning your dream home. Give us a call at 800.334.7499 or contact us here. We’re excited to show you our offerings and to help you see why Southern Oregon should be your new home.