Even though it might be simpler to obtain a mortgage as a W-2 employee than as a self-employed person, you don’t have to return to your cubicle in order to be eligible for a home loan. Some lenders might be worried that you won’t have a reliable source of income to cover your mortgage payments each month, and others might just be unwilling to handle the extra paperwork that comes with giving a self-employed person a mortgage.
It may take a bit more shopping around to find the best lender for your situation. But don’t worry, there are things you can do to improve your chances of getting approved for a loan if you’re searching for a self-employed mortgage.
Navigating the home buying process as a self-employed individual can feel like an uphill battle, especially when it comes to securing a mortgage. Traditional lenders often prioritize borrowers with steady, verifiable income streams, which can leave self-employed individuals feeling like they’re at a disadvantage.
But don’t lose hope! While the process may require a bit more effort, it’s absolutely possible to get a mortgage as a self-employed individual. This guide will equip you with the knowledge and strategies you need to navigate the path to homeownership.
Understanding the Challenges
Self-employed individuals often face unique challenges when applying for a mortgage. Unlike salaried employees who receive regular paychecks and W-2 statements, self-employed individuals typically rely on income from various sources which can fluctuate over time. This can make it difficult for lenders to assess their financial stability and creditworthiness.
Additionally, self-employed individuals may encounter stricter documentation requirements. Lenders may request additional paperwork to verify income, such as tax returns, business bank statements, and profit-and-loss statements. This can be a time-consuming process, but it’s essential to provide accurate and complete documentation to increase your chances of approval.
Overcoming the Hurdles
Notwithstanding the difficulties, self-employed people can increase their chances of getting a mortgage in a number of ways. Here are some key strategies:
1. Boost Your Credit Score: A strong credit score is crucial for any mortgage applicant, but it’s even more important for self-employed individuals. Aim for a score of 740 or higher to qualify for the best interest rates and loan terms.
2. Reduce Your Debt-to-Income Ratio: The debt-to-income ratio (DTI) expresses the percentage of your monthly income that is allocated to paying off debt. A lower DTI makes you a more appealing borrower and shows that you can handle debt better. Aim for a DTI of 43% or lower.
3. Make a Larger Down Payment: Putting down a larger down payment can significantly improve your chances of approval and potentially unlock lower interest rates. Aim for at least 20% of the purchase price, but a larger down payment can further strengthen your application.
4. Gather Necessary Documentation: Be prepared to provide comprehensive documentation to verify your income and financial stability. This may include tax returns, business bank statements, profit-and-loss statements, and business licenses.
5. Shop Around for Lenders: Not all lenders are created equal. Some specialize in working with self-employed borrowers and may be more flexible in their underwriting criteria. Compare offers from multiple lenders to find the best terms and rates.
6. Think About a Non-Qualified Mortgage: If you’re having trouble getting approved for a conventional mortgage, you should think about a non-QM loan. These loans may have higher interest rates and fees but have less onerous requirements for proving income.
Additional Tips for Success
Here are some additional tips to increase your chances of success:
- Work with an experienced mortgage broker: A knowledgeable mortgage broker can guide you through the process, help you find the right lender, and advocate on your behalf.
- Prepare a business plan: If you have a business plan, share it with your lender. This can demonstrate your financial expertise and commitment to your business.
- Be transparent and proactive: Provide all requested documentation promptly and be upfront about your financial situation.
- Be patient: The mortgage process can take time, especially for self-employed individuals. Be patient and persistent, and don’t give up on your dream of homeownership.
While getting a mortgage as a self-employed individual may require extra effort, it’s absolutely achievable with the right preparation and strategies. By following the tips outlined above, you can increase your chances of securing a mortgage and achieving your dream of homeownership.
Remember, you’re not alone in this journey. Many self-employed individuals have successfully navigated the mortgage process and become homeowners. With determination and the right guidance, you can too!
Bank Statement Loan
Bank statement loans, sometimes referred to as alternative document loans, let applicants submit their loan applications without having to provide the standard income-proving documents—tax returns and W-2s, for example. Instead, lenders look at 12 to 24 months of your bank statements to evaluate your business income.
Because the lender is taking on greater risk, bank statement loans typically have higher interest rates.
Establish a Self-Employment Track Record
Lenders will be more inclined to take a chance on you if you can demonstrate that you know how to play the self-employment game and win. You should have at least two years of self-employment history, documented by tax records.
During those two years, you might rethink some of your business deductions. Write-offs lower your taxable income, which is what banks consider when assessing applicants for loans, even though they help you save money on taxes. A stable or increasing income will also make you more attractive.
Is It Harder to Get a Mortgage Self Employed?
FAQ
How hard is it to get a mortgage if you’re self-employed?
What income do lenders look at for self-employed?
Can I buy a house if I just became self-employed?
Is it hard to get a loan when self-employed?
Can I get a mortgage if I’m self-employed?
You can get a mortgage on your home even if you’ve been self-employed for less than 2 years. Ultimately, your business must be active for at least 12 consecutive months. And your most recent 2 years of employment (including salaried work and other forms of income in the same line of work) must be verified.
Are self-employed borrowers more difficult to get a home loan?
Lastly, if you own 25% or more in a business, then you’re self-employed as far as the lender is concerned. While self-employed borrowers are held to the same lending standards as W-2 workers, the mortgage process itself can be more challenging. Why Are Self-Employed Home Loans More Complex?
Do self-employed borrowers pay more for a mortgage?
Because some lenders consider self-employed applicants to be higher-risk borrowers, you may pay more for your mortgage, says Mazyar M. Hedayat, a real estate attorney and former title company owner in Romeoville, Illinois. “If you’re a self-employed borrower, you have to make a decision,” Hedayat says.
What does it mean to be self-employed for a mortgage?
Qualifying for a mortgage when you’re self-employed means showing the lender that you can make payments for the entire length of the loan. Here’s what lenders want to see from self-employed mortgage applicants: Stable or increasing income. Some fluctuation is acceptable, but that’s why lenders like to see two full years of tax returns.