There are plenty of misconceptions about self-employed loans, but fret not — we’re here to set the record straight. Self-employed loans are more common than you’d think.
Plus, you have just as many options as “traditionally” employed borrowers. You’re held to the same standards for credit, debt, down payment and income as other applicants.
Paperwork
The part of this process that can be tough is documenting your income. You’ll need to have several supporting documents ready to present. As a business owner, contractor, freelancer or gig worker, proving your cash flow can require more paperwork than for salaried employees.
As long as you meet loan guidelines and can document a steady, reliable cash flow, you should have no issues buying a home or refinancing as a self-employed person.
[Related: How to Avoid Being “House Poor”]
Criteria
We thought we’d do the heavy lifting for you and compile the key criteria used when considering borrowers for mortgage loans:
- Credit score
- Credit history
- Debt-to-income (DTI) ratio
- Down payment
- Asset organization
Credit Score
Lenders look at your credit score and credit utilization ratio to determine whether you qualify for a mortgage. The lower your credit utilization ratio, the better your credit score.
If you need to improve your credit score, you can try the following:
- Correcting any errors in your credit history (personal info, account status, etc.)
- Paying your bills on time
- Applying for credit cards in your own name
You should try to get your credit in tip-top shape at least six months before you plan to begin applying for home loans. In fact, we wrote a little something on how to check your credit score the right way.
[Related: 8 Important Factors That Affect Mortgage Rates]
Credit History
Your credit history is information contained in your credit report, like whether you’re in debt and whether you pay your bills on time.
All consumers are guaranteed access to their credit history via a credit report, and they’re eligible for one free credit report from each credit bureau annually. You can access the report from the government-approved website AnnualCreditReport.com.
DTI Ratio
If your credit score and history are good but you’re still not approved for the loan amount you need, try lowering your DTI ratio. If you’ve got a lower DTI ratio, lenders will see you as a less risky borrowing candidate.
You can lower your DTI ratio by paying off or consolidating your debts. Check out some frequently asked questions we’ve answered in this blog.
[Related: Tips for Choosing the Right Loan Terms for You]
Down Payment
Typically, self-employed borrowers will need a larger down payment. The higher the equity in the home, the less likely a borrower is to walk away from it during difficult financial times.
A bank will see the borrower as less of a risk if they put a lot of cash into the purchase up front. Check out our Seattle Down Payment Guide for more information.
Asset Organization
Fully understanding your current finances is a large part of the mortgage process. To calculate your self-employed income for a mortgage, it’s important to be organized and consult with a professional to make sure you have exactly what you need to obtain a loan.
If you charge business purchases, such as a new computer or office supplies, to your personal card, you’ll increase your credit utilization ratio. This could have a negative effect on your application.
To craft an accurate and transparent application, keep your business and personal expenses separate by giving them their own accounts and credit cards.
Bottom Line
Lenders don’t always see self-employed borrowers as ideal borrowers because they have to provide more paperwork to document income and offer a larger down payment, but don’t let that sway you on your homebuying quest.
Use the tips we’ve listed, and rest assured that you can always reach out to a professional at Seattle Mortgage Planners.
[Related: Good Debt vs. Bad Debt: Considerations for Borrowing]
Contact Seattle Mortgage Planners Today!
Are you a prospective homebuyer curious about the homebuying process? Seattle Mortgage Planners can assist with anything from navigating closing costs and loan options to finding the best neighborhoods to move to in Seattle.
Contact us today to get started.
Featured image via Unsplash
