Self-employment can be an exciting and rewarding experience. The thought of setting your own hours and making every day “casual Friday” is appealing, but on a larger scale, it can be extremely fulfilling to grow a business that is yours as opposed to someone else’s.

However, if you ask any self-employed person in the U.S., they will tell you that this status also comes with a lot of hard work and many challenges. One of those potential challenges is getting a mortgage.

But, don’t run back to your W-2 job just yet. Getting a mortgage is possible, and the process isn’t as stressful if you know what to expect.

What’s the difference?

As with any mortgage, there is a lot of documentation required in order to assess the borrower’s overall financial health. For those who are self-employed, the paperwork burden is a bit greater.

“Lenders look at the stability and financial strength of your business, so they typically require at least two years’ worth of documentation,” said Patty Leonard, senior residential loan officer with Independent Bank. “This includes both business and personal tax returns and sometimes profit and loss statements as well.”

For someone just starting a business, this could be problematic. Banks want to know that a self-employed borrower can handle the mortgage payment over time and without a strong, documented history, they have nothing to go on.

If your new business is in the same line of work that you’ve had for several years, some lenders may allow 12-18 months of tax and income records, but this is on a case-by-case basis and all other qualifying factors will need to be solid.

“The other difference is in how we consider income,” said Leonard. “For self-employed applicants we look at net income, not gross. One of the advantages of self-employment is that you can deduct quite a few expenses from your taxes. However, these deductions also lower your taxable income, which can make it more difficult to secure a mortgage.”

Some experts advise reducing the number of tax deductions you claim if you know you’ll be applying for a mortgage in the next two years. However, it’s best to discuss this with your accountant beforehand.

Once you provide the necessary documentation, lenders will average your income over the two years. For instance, if you made $50,000 the first year and $75,000 the second year, they will treat your income as $62,500. Keep in mind that your income will need to show growth, so if your income was $75,000 in the first year and $50,000 in the second, they will use $50,000. If your income shows a pattern of decline, you may not qualify.

Is Everything Else in Order?

Self-employed borrowers are considered higher risk, so if there are problems with other qualifying factors, you could appear even riskier. To make yourself look as financially attractive as possible, keep your credit score high, offer a sizeable down payment, have significant cash reserves, and pay down — or pay off — consumer debt.

“The bar is set higher for self-employed borrowers, but obtaining a mortgage is definitely doable,” said Leonard. “Your best strategy is to be prepared in advance, so make sure you keep up-to-date records, gather all of your documentation, and consult with an experienced lender who can help you through the process.”

If you want more information, set up a consultation with a professional lender member of the Greater Lansing Association of REALTORS^®. Visit the website at www.lansing-realestate.com, for a list of local mortgage professionals.