How to Get A Mortgage When You’re Self-Employed
Getting a mortgage when you’re self-employed might be harder than if you’re a W-2 employee. But being self-employed does not immediately disqualify you from obtaining a mortgage. Today, we’ll walk you through the ins and outs of mortgage loans for the self-employed so that you won’t have to crawl back to the cubical-life before buying a home.
How to Make Yourself a More Attractive Loan Candidate
Lenders don’t always see self-employed people as ideal borrowers. Compared to the steady, easily verifiable incomes of employees, self-employed individuals feel like an unpredictable risk to traditional lenders. But, there are a few ways you can improve your prospects:
Point to Your Past
If you can show that you really know how to run a profitable business, you’ll be more likely to win the trust of the banks. The longer, the better, but aim to have at least two years of self-employment history to show to your lender via tax returns and bank statements.
Increase your Credit Score
A great credit score can also put mortgage lenders at ease. Displaying your history of responsible payments via your credit score will definitely help you get approved.
Today, in the midst of COVID-19, many lenders are requiring even higher credit scores to approve mortgages even among W-2 employees. So check your credit score and give it a good boost if you can.
Offer a Larger Down Payment
Banks sometimes want to see a lower loan-to-value (LTV) ratio. In other words, banks want to lower their risk by making sure the amount of money they loan out is less than the value of the property. In this case, the banks might need a larger down payment to lower their risk and know that you’re putting a lot of stock into the property as well.
Paying Down Debt
Win that mortgage and possibly qualify for a higher loan amount by knocking out your consumer debt. The fewer monthly payments you have, the more cash flow you can throw at your mortgage payments. This information will help the banks see you as a safe candidate.
Have a Hefty Cash Cushion
Lenders like to see that you have the financial whereabouts to take care of their loan. So having plenty of money in an emergency fund lets banks know that you’ll be able to make payments even if your business takes a turn for the worse.
Don’t Skimp on Your Documents
Lenders love documentation. So the more you can show them on paper, the better. Pull together all the tax returns, profit and loss statements, and balance sheets that can prove you’re profit is consistent and plentiful.
You may also need to provide bank statements, info on additional income, your list of assets, proof of your business employment, and your list of debt and monthly payments.
The Self-Employed Habit that Could Be Tripping You Up
As self-employed people, we often try to write off as much as possible on our tax returns to reduce our taxable income. But this can end up being your downfall when trying to get a mortgage loan.
The lenders need to see that you can afford the payments on the mortgage loan after all your business expenses are paid. So the more business expenses you claim on your tax return, the less money the bank thinks you have to pay your mortgage.
Finding the right balance between how much you spend on taxes and how likely you’ll be able to be approved for a loan is up to you. But if your goal is to buy a home, you’ll have to make sure that your taxes show that your business is making substantial money. In this case, may be worth it to shell out a bit more to the government each April.
What Loan Options Do You Have When You’re Self-Employed?
There are several mortgage options for the self-employed, including the ones we have below. If one doesn’t work out for your situation, take heart and try another option!
A conventional loan is available through private lenders, like banks, credit unions, and mortgage companies. These loans aren’t offered or secured by a government entity. To apply for a conventional loan, borrowers need to complete the official mortgage application, supply certain documents, credit history, and credit score. As we discussed above, having extra documentation can help self-employed workers get approved.
Federal Housing Administration loans are insured by the Federal Housing Administration. These loans are designed for borrowers with lower income or first-time home-buyers. They require lower credit scores and less of a downpayment (sometimes as low as only 3.5%) than conventional loans.
Banks like Rocket Mortgage from Quicken Loans, Chase, Carrington, and New American Funding provide FHA loan information and options for buyers. Oftentimes you can even apply online through their bank website.
Bank Statement Loans
Also known as alternative document loans, these loans let borrowers use non-traditional documentation to prove income. Rather than using tax returns and W-2s, lenders look at the last 12-24 months of your bank statements. While this can be a great option for self-employed workers, bank statement loans tend to have higher interest rates.
A joint mortgage can be a great option if your lender needs more assurance of a steady income. Applying for a mortgage with another individual who is a W-2 employee (like your partner or a trusted friend) can also ease the difficulty when trying to get approved for a loan when self-employed.
Enlist a Cosigner
Co-signers, like a parent or relative, can also provide that stable financial backing your bank is looking for. If you have someone in your life who is able and willing to assume full financial responsibility for your loan if you default, this can be a very easy option for someone who’s self-employed.
Feel Free to Reach Out
We hope this how-to helps you get approved to buy the home of your dreams. As always, feel free to reach out to your friends here at The Niv Lemoine Real Estate Group. We’ll happily do all that we can to make your move an easy and happy one!