The process of getting a mortgage is not much different for those who are self-employed. You fill out the same application, submit the same documents, and hope for the green light. However, how soon or how easily you get it approved is a whole different story.
Among the many factors lenders look at, your income certainly takes a front seat. Not only the amount, but its reliability is of high significance. When you are a business owner, freelancer, or define yourself as self-employed in any other way, the key is to convince the lender that you are a secure investment.
On that note, here is some information and tips to give you the best chance of approval.
What Are Lenders Looking For?
You can undoubtedly expect lenders to ask for verification of your income. The issue for self-employed applicants is that their earnings are not as verifiable as a salary contract. That is why you will have to offer proof of a few other aspects concerning your employment.
- The nature of your self-employment and its variables, such as location and profit potential.
- Financial stability and how it varies from year to year.
- The financial history, and strength
- Your ability or the scope of your work to yield sufficient income in the future.
Banks will need documentation that can demonstrate the security of your business. As a common practice, lenders request a two-year history of documentation and earnings to establish the income pattern.
Credit Score and DTI
Another significant factor for getting a mortgage is the credit score, which is not affected by your self-employed status. According to 2019 reports, the median credit score for a mortgage was 759 in the US. If you are self-employed, keeping track of your income is imperative.
Debt-to-Income Ratio, or DTI, is the percentage of your earnings that goes towards your debt. In general, the lower the rate, the higher your chances are to get a mortgage.
The question is simple, will you be able to pay back your loan?
Proving your Reliable Income
If self-employed, one has to take additional care of their financial circumstances. This is particularly significant as many business owners and freelancers are not always accurate with their taxation. Note that when showing income proof, only taxable income would be taken into account. If you mention that you earn $6000 a month and your tax forms show only $4000, then only the latter would be considered.
Make sure that you have all the documents listed below to provide a solid case of proof of income.
- Income documents, including 1099s, bank statements, and tax returns.
- Asset documents for investments, savings, and stock accounts.
- Debt documents such as credit card statements, student loan tax forms, and any other loan statement applicable to you.
Self-employed workers often write off business expenses as deductions. On the other hand, a higher income might look better to a potential lender to offer you low mortgage rates.
Shop Around for the Right Lender
When you plan to sell your home or buy a new one, you take considerable time to find the right real estate agent. You look for trustworthy UpNest reviews and interview multiple agents before you choose one. The same applies to lenders as well. You might want to look past the lowest rate and work with someone who can offer you the best rate for your financial package. Lenders might have different qualifying standards for working with self-employed applicants, and some might have specific loan products that might fit you well.
The process of mortgage approval might be a bit more complicated when you are self-employed. However, with enough preparation, it is far from impossible.