If you are self-employed, perhaps you have been worrying about buying your dream home or refinancing your loan. Self-employed borrowers may have a more difficult time during the mortgage application process. One reason for this is that it may be challenging to prove that you have enough income to pay off your loans.
However, just because you run your own business or work as an independent contractor doesn’t mean you cannot apply for a home loan. Not all home loan rates are a burden to a self-employed person. You can even find the lowest mortgage rates if you do your due diligence and find a great lender!
Now, if you don’t want to consider yourself out of the homebuying game, read on. This post will help guide you in securing a home loan that is not out of reach for a self-employed applicant like you. Here are five things you could do to get started.
1. Apply for a Loan Once You Achieve Stability
When you are at the beginning of your journey as a self-employed person, you may have difficulty getting your mortgage application approved. The majority of lenders want to see at least two years of your business success before approving you for a loan. They need proof of success to ensure that you will be a good borrower for many years to come.
So, you must wait to have at least two years of financial stability before you apply for a loan. Once you accomplish this, you will also surely get the best mortgage rates possible!
2. Separate Your Business and Personal Finances
When you apply for any loan, it is crucial to provide your income and debt documentation. By doing so, lenders will see whether you have the capacity to repay your loan. As a self-employed applicant, you must show documentation for business and personal finances.
If you want your mortgage loan to get approved, you must separate your checking and savings accounts, and credit card accounts for business and personal transactions. That’s because doing so enables the lender to have a clear idea of your overall financial health and adds credibility to your business viability.
3. Prepare What the Lenders Need to See
For self-employed borrowers, the loan approval journey is still very similar to salaried applicants. Before you apply, here are the documents you need to present:
- Two years of federal income tax returns for your business and personal earnings
- A collection of your latest business bank statements
- An updated profit-and-loss statement that shows revenue, expenses, and net income
- A copy of your business license
- A letter from a Certified Public Accountant that proves you’ve been in business for at least two years
- Credit reports from Equifax, Experian, and TransUnion
4. Don’t Put Your Savings on Your Down Payment
One of the most common practices of people who apply for mortgage loans is throwing all of their savings into the down payment. They think that doing so will lower their monthly mortgage payments and get them a lower interest rate. However, it would be best for self-employed borrowers like you to set aside money and keep it in your savings.
Most lenders consider business viability as a factor in approving loans for the self-employed. Now, if they know that you have stored away an amount for savings, they will perceive that you can maintain your monthly repayments.
5. Enhance Your Debt-to-Income Ratio
Regardless of one’s employment status, most lenders look at a person’s debt-to-income ratio as a factor in mortgage lending. Now, as a self-employed person, you might want to put yourself into the low-risk ratio range for you to qualify for a home loan.
You might feel that the struggle is real in securing a mortgage if you are self-employed. Although it might take you a few extra steps to get your loan approved, with this article’s five tips, you’ll turn your dreams of homeownership into a reality soon enough!
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