You may have heard about the view that mortgage lenders do not want to grant you a mortgage if you are self-employed. This statement is false. You get the same lending standard as self-employed as you will get as a W-2 salary earner. The difference is that the amount of documentation required from you as a self-employed person is more than the ones needed from an employee. You probably already figured out why. Mortgage lenders need to establish a stable and regular income. This is easy for an employee as they only need to show their salary record. However, as self-employed, the lender needs more documents to prove your financial capability to buy a home. The documents help them ascertain your income, what you can afford, and if you can pay off the mortgage on time. So, what do I need to qualify for a mortgage if I’m self-employed?
1. A Tidy Business Record
Mortgage lenders usually make up their minds from studying your business records. The business records show how healthy your business is. That is why mortgage lenders require a minimum of two years of business records which you could substitute for a full business year and a year of internship in the same company or industry. Your business record should also show how much you will earn if you pay yourself a regular monthly salary. This will give the lender an idea of a monthly personal income. Your business record must also show a stable revenue. If there will be fluctuations, it should be increasing income, not decreasing.
2. A Good Credit Score and a Low Debt-to-Income Ratio
Your credit score shows how you have performed with your previous loan engagements. It increases if you were good on your previous loans and paid on time but decreases if you do not pay back on time. Mortgage lenders check your credit score to determine your habit with your previous loans. Your debt-to-income ratio is the portion of your monthly income that you use to settle debts. Lenders tend to be very realistic with this ratio, examining how feasible it is for a self-employed person to pay off a particular portion of their income to settle the debt and still pay up their mortgage regularly. You need to have a low debt-to-income ratio of 42% or lower of your total revenue.
3. Hefty Down Payment and Savings
One of the factors that sway a mortgage lender in your favor is a hefty down payment. A 20% down payment, for instance, on a mortgage loan is a resounding bold move showing your lender you are up to the task of paying your loan at the stipulated time. Another factor that helps is having a healthy cash reserve or savings. Mortgage lenders do not like to read on your report that you spend almost all your revenue without putting any money aside. With a good amount of money in your savings, the lender feels assured he will get his money when due.
As a self-employed person looking to buy a home, the most important thing is a good plan. Consult your accountant to clean your business record and remove unnecessary business expenses and taxable income to make your business look as profitable as possible. Finally, use a professional mortgage lender with a track record of working with self-employed or business owners such as yourself.
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