Tips for Getting a Mortgage When You're Self-Employed
A lifestyle of self-employment should not prevent you from owning a home. Whether you're an entrepreneur, freelancer, contract worker, or some combination of them all, securing a home loan doesn't have to be off limits. In fact, it's probably a lot easier than you think! There may be a few additional steps compared to borrowers with traditional W2 income, but with a bit of preparation, you should be able to find a mortgage that meets your needs, doesn't break the bank with fees, and allows you to move into your own home with payments you can afford. There are a variety of nontraditional mortgage programs available, like Bank Statement Mortgages, Stated Income Loans, and beyond - and terms will vary slightly from lender to lender. Depending on your unique situation, you may even qualify for a more standard type of loan. You'll have to speak with available lenders to discover the specifics, but before you even begin to explore your options, there are some critical steps to take that will make the whole process go smoothly. Credit Score
Of course your credit score is important when applying for a loan. For self-employed individuals, the credit score requirements for mortgages are often steeper, simply because of the perceived volatility of self-employment.
If you're considering applying for a mortgage, it's certainly a good idea to check out your credit score in advance. Many lenders will be looking for a score in the 700s, so if you can, take steps to bump up your score before beginning the application process. Documentation
Documentation is everything! Self-employed individuals are often required to provide more documentation than more traditional applicants, and even though 2018 standards have reduced some of the paperwork needed, the more you can have prepared at the outset of the process, the better! This paperwork may include tax returns (both personal and business), bank statements, profit and loss statements for your business, your write-offs, business licensing, any additional income statements, and even proof of your current rent or mortgage payments. Each lender (and type of loan) will have different requirements, but the more you have put together and readily available, the more easily you'll be able to provide accurate documents at a moment's notice.
The larger the down payment, the easier it is to secure a home loan - regardless of your employment or type of loan. With that in mind, taking steps to maximize your down payment (like cashing out investments, selling assets, etc.) may be in your best interest. For self-employed borrowers, who present a greater risk to lenders by nature, a large down payment is a great way to keep terms favorable, potentially reduce credit score requirements, and start your mortgage off on the right foot.
This one's simple. Keep your business and personal accounts separate, and have separate documentation for each. This makes it easier for the lender to determine your personal income and the stability of your business, and see where expenses and volatility may lie with each.
Having these accounts separate is a courtesy to the lender, and will make your life easier as well!
Your debt-to-income ration (DTI) is your monthly debt payments divided by your monthly income. Most lenders look for a DTI of around 45% - with some flexibility depending on other factors. Calculate your own DTI before shopping for a home loan, and if you are at all able, take steps to pay down debts and improve your DTI. Paying off debts will also help your credit score!
These basic tips should help you prepare for just about any mortgage scenario. Being self-employed won't stop you from getting a great home loan, but if you can begin the process with good credit, strong DTI, a large down payment, and all of your documentation in order, you'll be leaps and bounds ahead of the curve.
Taking the time to prepare documents, pay down debts, and save for a down payment may delay your home buying goals, but the favorable terms, lower fees, and all around simplified process will make you glad you spent the time and energy to do things right.