6 Tips to Simplify the Mortgage Process for Self-Employed Borrowers
The process of getting approved for a home mortgage loan can seem complex, for sure. Any homebuyer looking to finance a home will be required to present ample documentation to their lender proving income, assets and debt. If you’re one of the more than 44 million Americans who is self-employed or work for a self-employed employer, the process can be a bit trickier — although not impossible.
The key to a stress-free transaction is to be prepared. Here are some tips to help self-employed home buyers get approved for a home mortgage loan.
Plan Before You Borrow — If you’re self-employed, it’s best to start planning well before you’re ready to buy a home. For self-employed borrowers, most lenders will take an average of income on your past two years’ tax returns. One of the biggest perks to being self-employed is the ability to take numerous tax deductions, but it’s also one of the biggest downfalls for self-employed home buyers. Unlike salaried borrowers, self-employed borrowers must use net income instead of gross income for their debt-to-income ratio. This means that if you’re taking a lot of tax deductions to save money on taxes, you may not be able to show enough income when you apply for a mortgage. If you know you want to buy in the next year or two, work closely with your CPA to carefully manage your taxes so you’ll be able to prove you have enough income to get approved for a loan. You may be able to file an amended tax return for previous years to show more income (but this may also mean you’ll have to write another check to the IRS).
Save, Save, Save — The more cash you have on hand, the more appealing you’ll look to lenders. Being self-employed typically means irregular income that can make some lenders nervous, but you can offset your irregular cash flow by having a lot of cash saved up. If you’re self-employed, try to save up at least a year’s worth of mortgage payments in a savings account. A larger down payment will also work in your favor as you’ll be financing less and will be less of a risk to the lender.
Reduce your Debt-to-Income Ratio — You’ll only be able to borrow a certain percentage of your income and lenders will look at your debt-to-income ratio to determine whether or not you qualify. This number is your recurring debt payments (housing, student loans, credit cards, car loans, child support, alimony, etc.) Pay off as much debt as you are able to before you apply for a mortgage. As a general rule-of-thumb, your housing-related debt shouldn’t exceed 28 percent of your monthly income, while your total monthly payments should be less than 36 percent. Paying off your car note or student loans can help lower your debt-to-income ratio, which will help you qualify for a larger mortgage.
Know Your Credit Score — The same goes for all home buyers, but the higher your credit score, the easier your mortgage-qualification process will be. A high credit score also means you’re more likely to receive a lower interest rate on your mortgage. Use free tools like CreditKarma.com and AnnualCreditReport.com to keep track of your credit score and review your free annual credit report. To maintain a good credit score, report any errors on your credit history immediately, pay all your bills on time and avoid opening too many lines of credit in the six to 12 months before you apply for a mortgage.
Be Ready to Provide Paperwork, and Lots of It — While any borrower will need to show ample proof of income, it is a little more difficult for the self-employed because you may not be able to provide past pay stubs like you would if you worked for another company. Instead, you’ll need to provide income tax returns for the past two years. You may also need to provide a profit-and-loss statement and balance sheet showing your assets and liabilities. Additionally, your lender may request to verify your self-employment by viewing tax transcripts or even getting third-party verification from someone you’ve done business with. At PrimeLending, we have a wide range of products that are good fits for self- employed borrowers and our home loan experts make recommendations based on your unique situation.
Find a Co-Signer — It’s often the last resort, but if you’re single and self-employed, it may be helpful to find someone to co-sign for you on your loan. This individual should have ample, salaried income to offset your self-employment income.
It may take some time, but here’s the short list of things you can do to as a self-employed borrower to make yourself look more appealing to lenders: First, register and license your business so you’ll be able to show verification of employment. Pay yourself a W-2 wage. Reduce your debt load. Take fewer tax deductions. Keep good records of income and expenses. Be prepared to make a larger down payment.
When you’re ready to purchase a new home, choose a lender who has experience working with self-employed, or a credit union or small mortgage company where you’ll be able to build a relationship with your lender. PrimeLending’s home loan experts can assist you in planning and applying for a home mortgage loan. Contact a branch near you today.
All loans subject to credit approval. Rates and fees subject to change. Mortgage financing provided by PrimeLending, a PlainsCapital Company. Equal Housing Lender.