Self-employed individuals frequently face difficulty when applying for a mortgage due to the fact that their income depends on how well their business performs rather than an established paycheck.
Fortunately, there are lenders specifically tailored to help self employed borrowers get approved for a home loan. These lenders have specific guidelines designed to make the process simpler and faster for these borrowers.
Stable Income
Stable income is an essential consideration when lenders assess a self employed mortgage loan application. In the mortgage industry, stable income is generally defined as consistent earnings that can be verified with traditional documents like W-2s and paystubs.
Employers usually rely on these documents to report an employee’s income; however, since a self employed mortgage is not typically a traditional loan type, verifying an individual’s earnings can be more challenging.
In some cases, lenders may require borrowers to present three, four or five years of tax returns and a statement from their accountant as proof of consistent self employment income.
The lender will want to see that you have a steady source of income and are not overextending your business or spending too much on expenses. To demonstrate these points, it’s wise to share two years’ worth of business tax returns from companies in which you own 25% or more, with your lender.
Good Credit
No matter if you are self employed, a small business owner or contractor, having good credit will enable you to secure the mortgage loan that meets your needs. Having good credit means having a history of timely payments and keeping debt levels low.
Lenders use credit reports to assess how likely you are to repay a loan, so maintaining your score is essential. Your score is calculated based on factors found in your report, such as the age of your credit history and number of applications submitted.
The typical credit score ranges from 300 to 850, with a “good” score in the middle. However, people with lower scores are often approved for mortgage loans.
Good Debt-to-Income Ratio
When applying for a mortgage as a self-employed borrower, your debt-to-income ratio is an important factor lenders will take into account. This ratio measures how much of your monthly obligations exceeds your gross income and helps determine whether there will be enough left over after making payments on your home.
If your debt-to-income ratio (DTI) is high, it may be harder to be approved for a home loan. However, decreasing your DTI before applying can provide more advantageous loan terms.
Lenders will look at both your credit score and history, as well as your debt-to-income ratio (DTI), to determine if you can afford the mortgage payments associated with a loan. Generally speaking, most mortgage loans have a DTI requirement of 43% or lower.
Borrowers who are self-employed or own a business typically take many deductions on their tax returns to reduce taxable income. This could reduce an individual’s qualifying income and, consequently, their mortgage amount if applying for traditional financing.
Joint Mortgage
If you’re in the market for a home with someone other than yourself, joint mortgages might be your answer. They tend to be more affordable than applying for a loan on your own and can be beneficial if your income or credit history doesn’t permit qualifying on your own.
Before you apply for a joint mortgage, there are a few things you should be aware of. Who else is on the loan and any lender restrictions should be taken into consideration.
Second, be certain you understand how your credit score will be affected. This will depend on the credit histories and scores of all parties involved in the loan application.
For instance, if your spouse’s credit score isn’t great or they don’t have much money saved up, it could affect the type of loan and interest rate you get. Fortunately, there are ways to avoid this problem; work with a lender who specializes in self employed mortgages or find a co-signer who will help cover expenses.
