Obtaining a mortgage as a self-employed individual can be straightforward if you stay organized. Regardless of your employment status-whether you’re self-employed, working on commission, or are a full-time or part-time employee-lenders are primarily interested in one key aspect when reviewing your mortgage application: the assurance that you can reliably make your payments.
In contrast to a W-2 employee, validating income for self-employed individuals requires extra effort. Therefore, it’s important to prepare in advance and ensure everything is organized before initiating the mortgage procedure.
When applying for a mortgage as a self-employed individual, you’ll typically face stricter documentation checks and potentially a deeper examination of your job history. However, by allowing yourself some time, there are numerous steps you can take to ensure that your mortgage application is as impressive as it can be when you’re ready to submit it.
Understand That You Have Options
A common misunderstanding regarding self-employed individuals and mortgage options is the belief that two years of tax returns are required to establish qualifying income. While this is accurate for certain loan categories, such as conventional, FHA, or VA loans, it isn’t the sole avenue available for self-employed buyers seeking to own a home.
Conventional lending criteria frequently fail to capture the actual financial status of self-employed individuals, whose incomes can vary significantly or who may utilize business deductions that reduce their taxable earnings.
At APM, we provide adaptable mortgage solutions designed for those who are self-employed, 1099 contractors, and gig economy workers. Our offerings feature unique qualification techniques like bank statement loans, allowing lenders to evaluate income through bank deposits instead of relying on tax documents, as well as asset utilization loans that take into account liquid assets to determine income.
These alternatives offer a better depiction of financial security and enhance the accessibility of homeownership. Discover additional information about these mortgage options here.
Create a Strong Credit Profile
Like all borrowers, those who are self-employed must also undergo an assessment of their credit score, credit background, and general financial wellbeing when applying for a home loan.
To enhance your likelihood of securing optimal loan conditions, it’s crucial to monitor your credit regularly, minimize any existing debt as much as you can, and make sure that your financial statements or asset documentation are organized before submitting your application.
You can access your credit report at no cost from any of the three major credit bureaus or at www.freecreditreport.com. Examine your report thoroughly. If you discover any mistakes, require further explanation, or have inquiries regarding your credit report, reach out to the bureau for assistance.
To secure a favorable mortgage rate, aim for a credit score of 720 or above. It’s essential to ensure your bills are paid punctually and to establish a repayment strategy for any overdue debts. Most creditors are inclined to cooperate, provided you reach out and demonstrate your commitment to addressing the outstanding balance.
Offer a Larger Down Payment
While some mortgage lenders for the self-employed may accept down payments as low as 3%, many typically require around 20%. Opting for a larger down payment is beneficial for two key reasons.
Initially, it demonstrates to the lender that you’re ready to invest in the endeavor. A larger amount indicates to them that you are genuinely devoted to becoming a homeowner. This is a pledge you are unlikely to abandon-in the perspective of the lender-because you have put forth a significant amount of money into the property.
Another advantage of making a substantial down payment when dealing with self-employed mortgage criteria is that it reduces the overall loan amount needed.
If you’re looking to buy a home costing $425,000 and can only provide a down payment of $21,250 (5%), you’ll need to get approved for a loan of $403,750. Alternatively, with a down payment of $85,000 (20%), you’d only need to qualify for a $340,000 loan. This can also help you obtain a better interest rate and reduce your monthly mortgage expenses.
Improve Your DTI
Once you provide your tax documentation along with a detailed inventory of your financial obligations and properties, a lender will calculate your DTI, or debt-to-income ratio. This calculation combines all of your liabilities, which consists of current mortgage payments, loans, credit card balances, alimony or child support, and any other unpaid debts.
Next, it takes that figure and divides it by your earnings. This calculation can factor in 1099 income from clients if you work for yourself, along with any additional income such as rental earnings, investment profits, dividends, funds from retirement accounts, and child support or alimony payments.
The outcome indicates the portion of your earnings that would go toward your mortgage and other obligations. To qualify for a mortgage, aim to maintain a low DTI; ideally, it should be 43% or lower.
Show a History of Self-Employment
Feel free to embrace a carefree and adventurous attitude in your social interactions; however, lenders prefer to link their borrowers with reliability, stability, and accountability. For those seeking a mortgage while self-employed, this means demonstrating a strong employment record.
Most lenders prefer that you have a minimum of two years of experience in your current profession. The more extensive your self-employment background, the more favorable it is. This is particularly pertinent if you can demonstrate consistent or rising income during that period. This standard applies not just to self-employment but also to side gigs or other supplementary income streams.
If you have recently become self-employed yet continue in the same field as before, this may assist in addressing a limited work history—make sure to consult your Loan Advisor for more information.
Provide Extra Documentation
The previous two years of filed tax returns are merely the starting point for self-employed mortgage qualifications. It may also be necessary to present three to six months of bank statements for both personal and business accounts (including checking, savings, and investment accounts). Furthermore, a year-to-date profit and loss (P
It’s possible that you will need to submit your latest balance sheet, 1099 forms from your clients, your most recent paid invoices, tax returns from previous years, and a letter from your accountant confirming your business’s ongoing operations.
Individuals who have periods of unemployment or experienced a drop in income might consider providing a letter of explanation to tackle these situations. Your accountant is available to help with this process. Additionally, they can guide you in modifying your business expense write-offs if it negatively impacts your ability to secure a mortgage.