Obtaining a mortgage, even for those with stable, salaried work, can be a difficult task. For those who are self-employed, several additional obstacles must be faced to gain approval for a home loan.
Lenders want to see that applicants can afford to make regular, consistent payments. Unfortunately, income for self-employed professionals is likely to vary from month to month, making this difficult to determine. Work stability may also be called into question, particularly if the business is fairly new.
There are several ways you can improve your chances of being approved for a mortgage if you are self-employed. This includes both in your preparation and while completing the application itself. The process will take more work than it would if you were traditionally employed, but it is by no means impossible to succeed. Use the following tips to help you qualify for the mortgage you want.
A lender will need to see proof that your income is not only stable, but steadily increasing. You may have planned to present your bank statements as proof of this, but lenders generally require additional documents from someone who is self-employed. This potentially includes having an income audit performed, as well as providing references from your clients. The lender might contact them in order to determine that you have enough work through your current contracts to sustain a mortgage loan.
Related article: Selecting the Right Home Loan
If you only recently started working for yourself, you may have the option of presenting your previous W-2s as proof of your work history. The lender decides whether this is adequate documentation. Keep in mind that it is only likely to be accepted if you are self-employed in the same field as the work listed on these W-2s.
As a self-employed applicant, you present a further risk to mortgage lenders than a traditional applicant would. For this reason, you must be ready to provide comprehensive records of yourself and your business with the application. This includes the following documentation:
It is very important that your business records are as reassuring as possible to the lender. Because of this, you want to take some time to ensure your personal and business records are kept separate. If you have not already organized these bank and debt records, do so before you consider applying for a mortgage.
Your personal and business tax returns are an important part of your application. As such, make sure to keep copies of all your tax-related transactions, as well as the details of your returns to ensure you are prepared. Keep in mind that a lender will look at your income after expenses in order to determine the profit and sustainability of your business.
As a self-employed professional, you likely take advantage of as many deductions as possible to lower your taxes. Unfortunately, this can cause problems when you are ready to apply for a mortgage. In long-term preparation for your mortgage application, consider lowering the number of deductions you take. This means you will pay higher taxes, but it could also mean you receive a much better mortgage rate.
Lenders will not only look at your debts, but also your debt-to-income ratio. Even with a sizeable income, a high percentage of debt can mean you are not considered a good candidate. As a result, it is best to clear all extra personal debt, such as credit card debt, as you prepare to apply for a mortgage.
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It is recommended that you have a debt-to-income ratio lower than 36 percent when you apply. This means the debt payments you make each month make up no more than 36 percent of your income. Consider increasing your payments in order to lower the debt ratio before submitting your application, or taking on extra work to raise your income.
Lenders always look at your credit score when considering you for a mortgage. When you are self-employed, this can make an even bigger impact on your success. If your credit score is low, take some time to improve your credit before applying for the mortgage. If your score is already high, make sure to maintain it as you prepare for your application.
If you have credit accounts for your business, these are considered as well. Ensure your business debts are kept to a minimum, and that you pay your balances regularly and in full. It is also recommended that you do not open new credit lines in the year before you apply for the mortgage.
One way to help assure a lender that you will be able to make your mortgage payments is to have a large sum of money saved up in advance. Showing evidence of a substantial emergency or savings fund can make a significant difference in getting approval. These savings can also be used when negotiating the terms of the mortgage. The lender may be more willing to approve your mortgage if you provide a larger down payment. Saving up for a few months or years before submitting your application can mean you have more bargaining power.
Applying for a mortgage when you are self-employed will always involve additional work. Because of this, obtaining professional assistance is often a great way to make sure you have the best chance at success. With this in mind, consider hiring:
You can also gain valuable assistance by finding someone willing to co-sign the mortgage with you. Having a co-borrower to guarantee the terms of the mortgage could convince a lender who would otherwise be unwilling to approve your application.
Related article: Strategies for Paying Off Your Mortgage Early
