Self Employed? 7 Ways to Qualify For a Mortgage

If you’re self-employed and you’re wondering if you would qualify for a mortgage, then yes, it’s possible. However, as a self-employed person, getting a mortgage is more difficult and challenging compared to employed individuals.

Lenders, in general, are concerned about whether self-employed individuals can repay their loans consistently. They need to see that you have enough income to pay for the mortgage and that you have a good track record of paying debts. With that said, lenders would usually consider the feasibility and stability of your business together with your current income to determine your qualifications.

Nevertheless, if you’re wondering how a self-employed individual can qualify for a mortgage, then you’re in the right place. Here’s what you need to do:

  1. Maintain Good Credit Scores

You will more likely qualify for a mortgage and receive competitive interest rates if you have a good credit score. Now, building a good credit score does not happen overnight. Your credit score is a culmination or reflection of your financial habits so far.

In order to maintain a good credit score, you must have a proven record of paying your credit card bills and loans on time. Your existing unpaid loans will also affect your credit score.

  1. Apply with A Co-Borrower

Self-employed borrowers who apply for a mortgage with a co-borrower have a higher chance of qualifying for a mortgage because the documentation requirements would be lesser.

But you need to make sure that your co-borrower has a W-2 showing that he/she is earning enough to repay the mortgage payment together with other expenses. Further, having little to no existing debts plus a decent amount of reserves will increase your chances of being approved.

However, for this approach, you need to talk to the lender. Lenders can include you on the loan so that both parties will be liable for the payments and own the property together. But lenders may also ignore your income in the countersigning process.

If you can’t find a co-borrower, you can try the method of house hacking. However, this is only feasible if you have an existing mortgage already. Basically, the idea is to rent out some parts of your house and use the rental payments you collect to pay for the mortgage of your property.

  1. Prepare All the Necessary Documentation

For self-employed mortgage borrowers, lenders will usually ask for extensive documentation. This is done to confirm your declared income and ensure that you indeed have the capacity to pay for the mortgage. So, before visiting a lender, make sure to prepare the following documents to make the process faster and convenient:

  • A Copy of Your State and Business Licenses
  • 2 Years’ Worth of Personal and Business Tax Returns
  • Balance Sheets
  • A Profit-&-Loss Statement Like Expenses and Debts
  • IRS Form 4506-T: This will allow the lender to access your tax records
  • Investment, Retirement, or Other Asset Account Statements
  • Any additional income like Social Security. You can also show proof that you are earning from gig economy jobs.

Lenders will look for taxable incomes and deduct everything that does not seem consistent and stable.

On the other hand, if you have been in the business for 2 years, you can expect that lenders may ask for more documentation related to your business such as contracts and communications from your current clients, evidence of memberships in professional organizations, and a letter coming from the CPA confirming that you have been in the business for at least 12 months or more.

In addition to that, lenders may also request a W-2 form from your past employer. If you have a good work history in the same industry or field, as proven by your W-2 form, you can get a mortgage within just one year of self-employed work.

  1. Don’t Take A Lot of Deductions

If you’re self-employed and you know you will be applying for a mortgage in the future or in the next 24 months, you need to reduce the tax deductions you are claiming.

For instance, if you say that your business is grossing $100,000 in revenue and has a total expense of $95,000, you will have a hard time getting a mortgage. It is completely fine to take a deduction but make sure to set limits. After all, it is for you if you want to qualify for a mortgage.

  1. Offer A High Down Payment

Keep in mind that the higher a home’s equity, the less likely borrowers are to walk away from their obligation in times of financial stress. Often, banks see the borrowers as less of a risk if they invest a considerable amount of money upfront.

  1. Check Your Debt-To-Income (DTI) Ratio

Your DTI ratio refers to the percentage of your monthly gross income that will go towards paying your monthly arrears.

Most lenders focus on this because it’s how they assess if you are a risky mortgagor or not. When your DTI is quite low, this is an indication that you’ll more likely meet the monthly payments. Meaning to say, you have more budget for the mortgage payment each month.

To calculate your debt-to-income ratio, divide your monthly recurring debt by your monthly income before taxes. Keep in mind that changing monthly bills like repairs, property taxes, utilities, and groceries are not considered debts and are not considered when computing your DTI.

In case your debt-to-income ratio is over 50 percent, you might need to settle existing debts first before applying for a mortgage. Most of all, avoid taking on more debt while you’re still paying existing ones.

  1. Separate Your Business Expenses

When you use your personal card to charge your business acquisitions like office supplies or a new desktop computer, you will upsurge credit usage. As a result, this may have negative effects on your application. Therefore, you have to keep separate credit cards and accounts for your business and personal expenses. This will allow you to have a more favorable financial profile on your application.

Conclusion

By following the ways mentioned above, you will more likely get approved for a mortgage even though you are self-employed. The most important thing here is to work on your credit score. This entails years of financial history, so you really have to plan things out and make smart financial decisions before even thinking about applying for a mortgage. A mortgage is a huge financial obligation that would take 15 to 30 years to pay. Therefore, you must demonstrate that you do have the capability to pay off the balance each month.

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