When mortgage companies look at applications, they look for those who have a consistent income, as those applicants are more likely to be able to pay their mortgage on time every month. Self-employed individuals may not have paystubs like those who are employed, so it can be more difficult to prove worthiness for a loan and to show that they can pay off the mortgage without issue. Still, this isn’t impossible to do, and there are a few things self-employed home buyers can do before they start applying for a mortgage to increase their chances of being approved.
Have at Least Two Years of Tax Returns
Lenders want to see that the applicant has a stable income, so they’ll generally look at paystubs. For those who are self-employed, however, paystubs aren’t available. Instead, have the last two years of tax returns available for the lender to view. This shows that the buyer does have a consistent income and can show how much the applicant makes on a yearly basis.
Show Stable or Increasing Income
Without pay stubs, those who are self-employed may have a more difficult time showing stable or increasing income. The tax returns help but try to organize other financial documents as needed, as well, to show the lender that there is a steady amount of income coming in and that it’s sufficient to cover the mortgage payments during the year.
Show Proof of Consistent Work
It is ideal to have at least two years of self-employment in the same industry to show consistent work history. Applicants who do not have this may want to work on other ways to improve their chances and wait to apply. However, those who have worked in the same industry before becoming self-employed may be able to show at least one year of self-employment as well as one year working with an employer in the same industry.
Improve Credit Score
Good credit helps make an applicant more attractive to lenders. If the credit score is low, applicants can take time to improve their credit score by paying off debts and waiting for any major issues like bankruptcies to fall off their credit reports. This may cause a delay in buying, but it can make it much easier for an applicant to be approved.
Pay Off Debts
Even with a good credit score, it’s better to have a low debt-to-income ratio. In most cases, the amount of money that goes to debts each month should be less than 43%, but the lower this percentage is, the better. Pay attention to the income on federal taxes compared to debt, as the income can show as much lower than reality if a lot of tax deductions are taken each year.
Separate Business and Personal Expenses
Business expenses charged to a credit card can be easy to track and pay off, but they do add to the overall amount of personal debt if they’re not put on a business card. Keep separate accounts for business and personal use, if possible, to show what expenses are business-related and which ones are personal expenses.
Increase Cash on Hand for Emergencies
Self-employed individuals may not make the same amount every month. Some may be busier at certain times of the year and slower during other times. If this is the case, having cash on hand to cover the slower periods and for emergencies helps to show lenders that the mortgage will be paid every month, even if the business is slow.
Offer a Larger Down Payment
Larger down payments mean smaller mortgages, but there’s more to it than that. When a buyer is willing to make a larger down payment, it can help encourage lenders to approve the mortgage. This is not a saving grace if the buyer has other issues with their application, but it can help some buyers get a more favorable interest rate if they’re approved.
Find the Right Lender
The right lender can make a huge difference in the chances for approval. Though the tips above are designed to make the buyer more attractive to lenders, finding a lender that has experience working with self-employed individuals is always a good idea. They’ll have more knowledge about loans that may be a better fit for someone who is self-employed and will be able to help the individual have a better chance of being approved.
Those who are self-employed can get a mortgage, but they may find it’s more difficult. They will need to do more work leading up to their application since they don’t receive regular paychecks. Still, it is possible for a self-employed individual to obtain a mortgage, so long as they’ve done the steps above and are ready to apply.
Photo by Brad Javernick of Home Oomph
