How to Qualify for a Mortgage When You Are Self-Employed
March 4, 2023
It is known that getting a mortgage is easier for W-2 employees compared to self-employed individuals, but this is not a reason for you to run back to a blue-collar job to qualify for one. Most lenders usually find applicants who lack a constant monthly income at risk, while others do not want to deal with the rigorous paperwork. However, if you are self-employed, there are several steps you can take to make your application more attractive and increase your chances of qualifying for a mortgage.
Self-employed applicants can improve their prospects by putting down a larger payment, paying down debt, or increasing their credit score. The most suitable mortgage loans for self-employed individuals are FHA, conventional loans, and bank statement loans. Depending on the circumstance, it is also possible to enlist a cosigner or take out a joint mortgage. Here are some of the ways you can increase your chances of acquiring a mortgage.
1) Establish a Self-Employment Track Record
Keeping a track record means you have proof of your income, which instills a lender’s confidence in your ability to pay the loan. This can be done through several steps, including recording income on a ledger, stating the amount received and the date received and putting identifying information that can help lenders reference back to that transaction. Having a track record that dates back two years or more is advisable since it shows your stability in terms of finances.
2) Max Out the Credit Score
Having a high credit score increases your chances of qualifying for mortgage loans with low interest rates in any borrowing scenario. The truth is that being self-employed does not affect your credit score. However, this does not stop lenders from viewing your application with scrutiny. As a self-employed applicant, some ways to max out your credit score include; having two years of personal and business tax returns, documentation of your self-employed status, and documentation of your business status.
3) Offer a Larger Down Payment
In the current economic conditions, lenders and financial institutions are likely to view self-employed borrowers as potential risks, especially if the loan is substantial. As an applicant, putting down a larger payment lowers the chances of denial since you do not pose a higher risk. In addition, higher equity in home builds credibility for most lenders than a small down payment for self-employed applicants.
4) Provide Documentation
Before consulting various lenders for a mortgage loan, it is vital to ensure all the relevant documentation is needed. This includes profit and loss statements, dated tax returns, and balance sheets. Although these documents are essential and likely to get you the loan, some lenders can ask for additional documents such as; bank statements, a list of debts and monthly payments, proof of business or employment, and other sources of income.
All loans are subject to credit approval. Interest rates are subject to change daily and without notice. Current interest rates shown our indicative of market conditions and individual qualifications and will vary upon your lock-in period, loan type, credit score, purpose and loan to value.