History is Critical for Self-Employed Mortgages
Securing a mortgage when you're self-employed can be difficult. Some lenders barely offer options that meet your needs, while others may provide home loans for nontraditional employment, but with rates and fees that are prohibitive for many people. Many of the rules that exist today can be barriers for self-employed homebuyers, including some of the standards of the "ability to repay" (ATR) rule. Generally speaking, a lender needs to determine that you'll be able to pay back your loan, so they examine employment, assets, debt, income, tax returns, and so on. Unfortunately, many self-employed individuals have difficulty meeting these terms because of the very nature of their income. It may be seasonal work, where the bulk of the money is made during just a small part of the year - or simply the ups and downs of freelance work or business ownerships. All of this variable income (and things like write offs, distributions, and so on) can make the documented income of an individual appear less than ideal for a traditional lender/loan. Fortunately, one type of mortgage referred to as a "bank statement loan" may be just the solution you need!
With a bank statement loan, the main method of income verification comes from looking at your bank statement history. For a self-employed person, this helps show consistent income over the long-term, even if actual figures vary wildly from month to month.
When pursuing this type of home loan, however, your long-term bank history plays a critical role. With a long history, ideally 24 months, a lender will be able to determine an average income over the course of two years, even if fluctuations occur from month to month or week to week. While a lender still needs to protect themselves from risk (namely the borrower defaulting on the loan), these bank statement mortgages don't follow the exact ATR rules of other loans - so the lender can determine their overall risk based largely on your bank statement history. Again, the more history you can provide, the better the averages can be determined, and the more accurately the lender can assess your likely ability to repay. So, if you're self-employed and exploring your options for home loans, don't overlook the value of a bank statement mortgage. As with all nontraditional home loans, you may have higher interest rates or larger down payment requirements, but for many people, those are only small obstacles compared to the benefits of owning a home.