Imagine this: You've decided to take that first step to create your perfect future by becoming an entrepreneur. You planned on working for a few years before you decided to move since you know traditional lenders like to see a steady stream of income. 

Suddenly, your dream home comes on the market. You know it won't last long, and you'll never find another home like it. But the problem is that you've only been your own boss for one year. Is that enough to let you qualify for your mortgage loan?

While this might not be your exact scenario, you probably have the same question. In this post, we'll cover how you can get approved for a mortgage with only one year of self-employment and things you can do to improve your chances.  

TLDR Key Takeaways

• For self-employed people with a long history in the same industry and whose first year's income is comparable to their previous work, qualifying for a mortgage will be easier.
• If you've transitioned into a new career path, then you'll need to prove your financial security via excellent credit and plenty of cash reserves for emergencies or large down payments.
• If you are able to improve your credit score, maintain good cash reserves, and provide evidence of future income, that can help increase the likelihood of being approved for your mortgage.

Is It Possible to Get Approved with Only One Year of Self-Employment?

While you'll certainly have a more difficult time getting approved with only one year of self-employment income, it is possible. 

Remember, lenders are concerned first and foremost about your ability to repay your loan. If they feel that your income isn't reliable or if they think there's a possibility you will default, you'll be classified as too risky, and your loan will be denied.

So what scenarios would make lenders see you as a strong mortgage candidate?

Scenario 1: You're in the Same Industry

When you made the transition to self-employment, the chances are fairly high that you hopped into the same industry. This is good news for you! 

If you've been working in the same field for a few years and your first-year income is comparable to your previous years, this will show lenders that you've demonstrated success in your industry and will likely continue to do so.

For example, let's say you were a graphic designer for a large marketing agency making roughly $80,000 per year. You set out on your own the following year and pulled in $100,000. 

Due to your proven experience in the field and similar income, lenders will likely feel more secure about your financial status and approve your loan.

Scenario 2: You've Got Excellent Credit and Large Cash Reserves

If you transitioned into a new career field, then your options are slightly more limited. You'll need to prove that you have the financial security to back up your loan, which means you'll need a lot more skin in the game.

An excellent credit score and large cash reserves are two of the best ways to do this. A good credit history will show lenders that you're a responsible borrower and that you make on-time payments. 

Having a large reserve of money in the bank will prove that you have the funds to cover any outstanding debts or expenses. Plus, you'll be able to put up a healthy down payment.

How to Increase the Odds of Getting a Mortgage as a Newly Self-Employed Individual

When applying for a mortgage as a newly self-employed individual, there are certain steps you can take to increase your chances of success. 

1. Improve Your Credit Score: Many lenders require a minimum score of 600, but you'll likely need a higher one if you only use the most recent tax return. Do everything in your power to get this as high as possible.
2. Maintain Good Cash Reserves: The more cash reserves you have, the better. This gives lenders peace of mind that even if something goes wrong, you will have enough money to make your payments and not default on your loan.
3. Provide Evidence of Future Income: If you're confident your income will continue to grow, lenders may be willing to take this into consideration. This can come in the form of contracts or letters from clients that demonstrate future income.
4. Put More Money Down: Putting more money down on your home means you'll have less of a loan amount and, thus, be viewed as less of a risk. If you supply a sizeable down payment (20% or more), it will help greatly in getting approved.
5. Minimize Your Debt-to-Income Ratio (DTI): Lenders like to see that you're not overextended with debt, so they'll look closely at your DTI. If you have a DTI of 36% or lower, you'll increase your chances they will approve your loan.

Explore Your Options with Modern Day Lending

While it's not always easy to get approved with only one year of income, our team of experts over at Modern Day Lending is here to help you explore your options and find the right loan for your needs.

Unlike traditional lenders, we take a more common-sense approach to qualifying you for a mortgage. We'll take the time to learn about your business and financial situation to find a loan that works for you. 

And the best news is we might not even need your tax returns to qualify you for a loan! Here's what you'll need to get started:

• Bank Statements: Instead of using your tax returns to prove your income, we'll review your bank statements for the past 12 to 24 months to calculate your gross income.
• CPA Letter: A letter from your accountant stating how much of your business you own and its financial standing is required. 
• Business Questionnaire Form: This questionnaire is designed to assist us in understanding the prospective home buyer, the property they are interested in, and their ability to repay the loan.
• Personal Asset Statement: We require the business's assets and liabilities to be documented for at least two months.
• Driver's license: This is a formality to confirm you are who you say you are.

Ready to get started? 

Our advisors are ready to provide you with expert advice and guidance. Contact us today and take the first step toward homeownership!