Buying a home is a big step, and going through the process as a self-employed veteran can make it feel even more challenging. While VA loans come with amazing benefits–like no down payment and no interest rates–getting approved when you don’t have a traditional W-2 job can make things a little more complicated. No need to worry, getting a VA loan as a self-employed veteran is possible, but you should know of some key differences.
This guide will cover how the VA loan process differs for self-employed veterans compared to those with traditional employment. From gathering the right income documents, to managing your debt, we’ll help guide you through the process.
The Biggest Difference: VA Loan Income Documentation
The main difference between self-employed and traditionally employed veterans is proving your income. With a traditional job, it’s simple. Lenders will ask for your W-2s, pay stubs, and an employer verification. This gives them a clear picture of your income and how stable it is.
If you’re self-employed, proving your income is a little more involved. Instead of W-2s, you’ll need to prove your income in other ways. Typically, you will need to provide two years of tax returns, profit-and-loss (P&L) statements, and other business records. The goal is to shoe lenders that even if your monthly income changes, you have stable earnings over time.
Lenders are looking to see that your income is steady over the long term, even if it fluctuates month to month. If your business is growing, it’s a good idea to show that growth. This can help reassure that you can handle mortgage payments.
But how do lenders determine if your income is stable enough?
How VA Lenders Judge Income Stability
Lenders need to know that you are able to make your mortgage payments. For veterans with a traditional job, this can be easy to prove with W-2s and pay stubs.
For self-employed veterans, lenders look at things a bit differently. Instead of gross income, they focus on your net income–what’s left after business expenses. If your business costs are high, this can lower the amount of income lenders will count when approving your loan. To improve your chances of getting approved, make sure your tax returns and P&L statements show a steady income over the last two years.
Be ready to explain changes in your income to your lender. For example, if your income varies due to seasonal work or other reasons, make sure to explain that to your lender. Highlight and long-term contracts or steady revenue that prove your financial stability. Being clear and honest about your income can go a long way in helping lenders know your situation.
The Importance of Debt-to-Income Ratio (DTI)
Another key part of getting a VA loan is your debt-to-income ratio. DTI tells lenders how much of your income goes towards paying off your debts. Things like credit cards, car loans, or student loans are all factored into determining your DTI ratio. Lenders want to see a lower DTI because it proves that you can manage mortgage payments along with other financial responsibilities.
For self-employed veterans, it’s a bit more complicated. Lenders often use your net income, after business expenses, to calculate your DTI. This can sometimes reduce the amount of loan you qualify for. To improve your chances, try to pay down any outstanding debts before you apply. The lower your DTI, the more appealing you’ll be to lenders.
Pro Tip: Aim for a DTI below 41% to boost your chances of getting approved.
Clearing Up Myths About VA Loans for Self-Employed Veterans
Many self-employed veterans think they can’t qualify for a VA loan simply because of their work situation. Let’s clear up a few common misconceptions:
Myth 1: “VA Loans Aren’t Available to Self-Employed Veterans”
This is false. VA loans are open to all eligible veterans, including those who are self-employed. There might be a few more documentation requirements, but if you are approved, the same benefits will still apply.
Myth 2: “Fluctuating Income Makes It Harder To Get Approved”
Not exactly. Lenders understand that self-employed income can vary month to month. As long as you can show steady income trends over the past two years, you’re in good shape to get approved.
Myth 3: “The Documentation Process is Too Complicated”
While you do need to provide additional documents as a self-employed veteran, it’s not as hard as it sounds. Lenders will ask for two years of tax returns, P&L statements, and things like bank statements and business licenses. Gathering these documents can be straightforward with the right help.
Don’t let myths stop you from applying for a VA loan. With the right preparation, you will qualify for a loan as a self-employed veteran.
Tips to Make the VA Loan Process Easier for Self-Employed Veterans
While the process requires a little more effort for self-employed veterans, these tips can help you stay on track:
- Get Organized Early: Gather two years of tax returns, P&L statements, and other business records before you start applying. Having everything organized will speed up the process.
- Monitor Your Debt-to-Income Ratio: Lenders will closely look at your DTI. Reduce any debts that you can before applying to give yourself the best chance of approval.
- Work With a VA Loan Specialist: Work with a loan specialist that has experience in helping veterans who are self-employed. VA Loans For Vets can guide you in the right direction and help you along this process.
Just because you’re self-employed doesn’t mean you can’t get a VA loan. With some extra preparation, you can take full advantage of the benefits VA loans offer. Organizing your financial records, keeping your debt low, and working with the right specialist can make the process smoother.
If you’re ready to start, VA Loans For Vets is here to help. We specialize in working with self-employed veterans and can guide you through every step. Contact us today to get one step closer to owning your home.
