When you are self-employed, getting approved for a mortgage loan can be challenging, but it’s not impossible. Lending institutions typically have a rigid set of criteria that can add to the complexity of the loan process and make it a little more challenging. But no worries, as always knowledge is power and preparedness is key. Knowing what steps to take to help you get ready can make life easier. Here are some strategies you can employ that will make the process easier and increase your chances of getting the funds you need. Below are the top six tips to help you get through the process of getting your mortgage if you are self-employed.
1. Establish A Self-Employment Track Record
Most lenders will want some evidence that you can sustain your business over time. So, before applying for a mortgage loan, be sure you have at least three years of self-employment history on your credit report (minimum 2). One year of self-employment may not be enough for most lenders, who prefer at least two or three years of solid employment experience under your belt.
2. Maintain A Good Credit Score and Credit History
A mortgage company will look at your credit score when evaluating your application. A good credit score can significantly boost your chances of getting approved for a loan. If you’re self-employed, it’s important to keep track of your accounts and stay on top of payments, especially if you have debts that are unrelated to business expenses.
3. Debt-to-Income (DTI) Ratio
DTI is calculated by dividing your monthly debt, such as credit card payments, student loans, and car payments by your gross monthly income. If you’re self-employed, include your total business expenses as well as your personal living expenses. Lenders will not want you to have too much debt. Most banks and lending institutions are likely to lend you money for your mortgage if your DTI is under 36 percent of your income.
4. Save Up to Offer a Large Down Payment If Possible
If you can offer a large down payment for your house, you’ll likely qualify for better loan terms, interest rates, and even better mortgage insurance coverage. Most lenders require a 20% down payment of a property’s value.
5. Increase Your Savings to Show a Cash Reserve
Having adequate funds for monthly payments is also key when applying for a mortgage loan. But how do you prove that you have enough money saved up? A good way to do so is by showing your lender what’s in your bank account. You can prove this by linking all of your accounts together. This way, they’ll know that you can afford not only current payments but also future ones.
6. Provide Documentation
If you’re self-employed, it’s crucial that you provide solid proof of your income and tax returns for at least three years when getting a mortgage. Other documents you may also need to provide include:
• Business license
• Year-to-date profit and loss statement (P&L)
• Balance sheet
• Asset account statements, including retirement or investment accounts
• Any other income, such as Social Security or disability
• Additional documents such as letters from clients, a statement from your accountant, among others.
The Takeaway
There are many reasons why you might be self-employed. However, that does not mean that you can't get a mortgage loan. If you can prove your income through documentation, make sure your credit score is above 660 and be ready for higher down payment requirements, there should be no problems getting approved for a mortgage loan.
Do you wish to learn more about mortgage loans for self-employed individuals? Get in touch with one of our experts at Diamond Residential Mortgage Corporation today.
