You just have to know upfront the additional hoops you’ll have to jump through to get a mortgage.
We break it all down for you here.
Disadvantages of Self-Employment for Getting A Mortgage
For the self-employed, some lenders may be concerned that they won’t provide steady income to make regular monthly mortgage payments.
That’s why self-employed borrowers will have to provide more documentation of income compared to a traditional employee who can produce a W-2.
Add to this that the self-employed deduct a lot of business expenses to reduce taxable income. Great for taxes, but not so great when it comes to buying a home.
Finally, lenders may want to see a lower loan-to-value ratio. That means the self-employed will need to come up with a larger down payment.
How the Self-Employed Can Become an Attractive Mortgage Loan Candidate
Here’s what you’ll need.
Self-Employment Track Record
Show your lender you know how to play the self-employment game. Have at least two years of self-employment work history. If you have more than two years, all the better!
It will demonstrate that your income is stable.
High Credit Score
Good credit is everything! Make sure you have a higher credit score. If you don’t have a good score, work to clean it up before applying for a mortgage loan.
The higher your score, the more attractive you are to a lending institution.
Make sure you have a large down payment. A bank will see you as less of a risk if you have a large down payment.
Besides a sizable down payment, show that you have plenty of money stashed away in an emergency fund. Lenders like to know that even if your business falls on lean times, you can still make monthly payments.
Get rid of as much consumer debt as possible. Pay off car loans and credit cards. Doing so may qualify you for a higher loan amount because you’ll have more cash flow.
Documentation is Essential
Full documentation of income through tax returns, balance sheets, and profit and loss statements will increase the chance of qualifying for a loan. Be prepared to provide the following:
- Bank statements
- Debt list and monthly payments
- Proof of business such as a business license, statement from your accountant
- Asset list such as investment accounts, savings accounts
- Any additional sources of income such as alimony, Social Security payment
What If You Don’t Qualify for A Conventional Mortgage Loan?
If you don’t qualify for a conventional loan, there are several possibilities.
Some lenders offer a Federal Housing Administration loan, or FHA loan.
These loans are issued by an FHA-approved lender and are designed for low-to-moderate income borrowers. They require a lower down payment and lower credit scores than many of the conventional loans.
Because FHA loans are federally insured, meaning that lenders are protected if the borrower defaults on the loan, more favorable terms can be offered.
Bank Statement Loan
Another possibility includes bank statement loans, or alternative document loans, which allow a borrower to apply for a mortgage loan without providing traditional documents that prove income such as tax returns and W-2s.
Lenders instead look at 12-24 months of your bank statements to determine your business income. This loan has higher interest rates because the lender is taking on more risk.
If your significant other or spouse is a W-2 employee, it makes sense to have them as a co-borrower on the loan with you. This provides more assurance to the lender that there is another source of steady income.
Other possibilities for a joint mortgage include parents or a trusted friend.
Lastly, asking a parent or relative to co-sign your mortgage loan is another option. Remember, the person who signs on for this must be willing and able to assume full responsibility for the loan should you default.
It may take a bit more work, knowledge, and patience, but the self-employed can find ways to qualify for and get a mortgage.
When you’re ready to close on your new home, turn to the pros at Lilly Title & Settlement. We offer real estate settlement services as well as title insurance. Learn more about us here.