How To Get A Mortgage When Self Employed
How To Get A Mortgage When You're A Self-Employed Home Buyer
If you're self-employed and want to buy a home, you may be wondering how to go about doing so. Luckily, you will fill out the same mortgage application as everyone else. Mortgage lenders also consider the same things when you're a self employed borrower: your credit score, how much debt you have, your assets, and your income.
So what's different? When you work for someone else, mortgage lenders can go to your employer to verify the amount and history of your income. When you're self employed, it is your responsibility to provide the necessary documentation to verify that your income is valid and stable.
Qualifying for A Mortgage When You're Self-Employed
When it comes to qualifying for a mortgage when you're self-employed, there are some important factors that potential home buyers must consider. The first is your credit score. Your credit score will be examined closely in order to determine if you’re able to meet the requirements of taking out a mortgage loan as well as your ability to repay the loan.
The second factor to consider is your debt-to-income ratio (DTI), which compares the amount of money you owe on loans, credit cards and other forms of debt compared to the amount of income you have coming in. Lenders usually want a DTI that's below 43%. You can calculate your own DTI using the simple calculator below.
Additionally, lenders will want to see proof of your income for the past two years. This is usually done in the form of tax returns, business bank statements and profit & loss reports from your business. Lenders also consider assets such as investments, retirement accounts and other liquid assets when they are reviewing a self employed borrower’s application.With all this in mind, self employed borrowers may need to put down a larger down payment or have a higher credit score in order to qualify for a mortgage.
However, even though the process may seem daunting or complicated, it is possible for self-employed individuals to buy their dream home with the help of a mortgage lender. Working with an experienced mortgage professional can make the process easier and help you find the right loan for your needs. So don’t be discouraged! With a little bit of guidance, you can reach the dream of homeownership as a self-employed individual.
What Are Mortgage Lenders Looking For?
Mortgage lenders want to make sure that self employed borrowers will be able to pay back their loan in a timely manner. To do this, they look for several key factors when evaluating an applicant's application:
Income stability
The location and nature of your self-employment
The financial strength of your business
The ability of your business to generate sufficient income in the future
What Documents Do You Need To Provide?
To start the home buying process, you'll need a history of uninterrupted self-employment income, usually for at least two years. Here are some example of documents a lender might ask for:
Employment Verification
This is proof that you're self employed. It could include emails or letters from the following:
Current clients
A licensed certified personal accountant (CPA)
A professional organization that can attest to your membership
Any state or business license that you hold
Evidence of insurance for your business
A Doing Business As (DBA)
Income Documentation
This is to show lenders that you have proof of steady, reliable income. Note that even if you make consistent money now, your past income will also influence your ability to get a loan. Your lender will ask for the following:
Personal tax returns (including W-2s if you're paid through your corporation)
Profit and loss statements, which could include a Schedule C, Form 1120S or K-1, depending on your business structure
Bank statements, which are monthly or quarterly documents that help your lender verify that you have sufficient funds to cover a down payment
What Happens If You’ve Been Self-Employed For Less Than Two Years?
You can still get a mortgage on your home, even if you’ve been self-employed for less than two years. Ultimately, your business must be active for a minimum of 12 consecutive months, and your most recent two years of employment (including non-self employment) must be verified. In this situation, your lender will likely do an in-depth look at your training and education to determine whether your business can continue a track record of stability.
Tips To Put Your Best Application Forward
As your own boss, you want your business to look its best to prospective clients. As someone who wants to buy a home, you want your loan application and financial status to look its best to lenders. Here are a few ways to do so:
Check Your Debt-To-Income Ratio
Checking your debt-to-income (DTI) ratio is an important step in the homebuying process for self-employed individuals, as it gives lenders a clear picture of your ability to handle the repayment of a mortgage. Your DTI ratio is calculated by dividing the sum of all your monthly debts (including any outstanding loans, credit cards, or other debts) by your total monthly income. A lower DTI ratio is better for borrowers, as it demonstrates a strong financial outlook and ability to meet payments in full and on time.
Keep An Eye On Your Credit
Keeping an eye on your credit is essential if you're self-employed and looking to purchase a home. Lenders will review your credit score when evaluating your loan application to determine whether you would be able to make timely payments. Maintaining a good credit score is key, as this can affect your ability to secure a mortgage with favorable terms.
Keep Business Expenses Separate
It is also very important to keep your business expenses separate from your personal expenses when you are self-employed and looking for a mortgage loan. This can help you demonstrate to lenders that you have the financial stability and means to pay back the mortgage. Keeping your business finances separate from your personal finances helps lenders understand the liquidity of your assets, as well as accurately assess your overall financial ability.
Conclusion
When it comes to getting a mortgage if you're self-employed, it is important to keep in mind that you'll be expected to provide some extra documentation. This includes proof of employment and income, such as tax returns, profit and loss statements, bank statements, business licenses, emails/letters from current clients, and any other documents that can demonstrate your financial stability. Your credit score and debt-to-income ratio will also be taken into consideration by lenders. With the right documentation and some patience, self-employed individuals should have no problem getting approved for financing on their new home. Good luck!
