Are you thinking about getting a mortgage when self employed and you aren’t sure what to do? Read this article to learn what you need to know.
If you’re one of the estimated 16 million self-employed Americans, you enjoy benefits like freedom over your work and control over your earnings. But at the same time, you can face more difficulties when it comes to getting a mortgage and buying a home.
While you can expect to jump through some more hoops, the good news is that getting a loan when self-employed is possible. You just need to know what lenders look for and prepare the documentation and funds needed to compensate for the higher risk you present.
Read on to learn the basics of getting a mortgage when self-employed.
Understand Challenges of Getting a Mortgage
Unlike having a regular job and salary, self-employment comes with more fluctuations in income. Mortgage lenders consider this in determining how risky of a borrower you are. So, you can find it harder to get approved for the amount you need or approved at all.
Lenders usually want to see that you’ve got one or two years of stable self-employment income. So, if you just started your business, you might run into a problem unless you’ve got a co-borrower with enough income alone.
Another challenge self-employment brings is that your income may look lower due to expenses you claim. Lenders often use a combination of tax returns and a profit-and-loss statement to assess your finances. Business purchases and tax deductions can make qualification more of a struggle.
Know How to Qualify Successfully
As long as you can prove one or two years of profitable self-employment, getting a mortgage is possible. But you also need to meet some other requirements and be prepared to submit extra paperwork. Take note, even if you are self-employed you can still be eligible for government backed options like USDA financing if you’re able to come up with these requirements.
Having a stellar credit history and a high credit score can help with approval. It can also get you a better mortgage rate.
You’ll also want to make sure your debt isn’t too high in relation to your taxable income. Generally, lenders follow the 28/36 rule. This means you shouldn’t have a mortgage payment over 28 percent of your monthly income and that all your monthly debts shouldn’t exceed 36 percent of your income.
You’ll also need to gather documents to prove your income. This often includes gathering bank statements and tax returns and making a profit-and-loss statement. You might also consider using the paycheck generator at www.paystubcreator.net to show proof of your earnings.
Your lender will also look for cash reserves and a down payment. The more you have for these, the better since it can reduce the risk for the lender.
If it comes to it, you may find it helpful to get a co-signer or co-borrower who has a stable income from a regular job. This may also help you qualify for a higher loan amount.
Getting a Mortgage When Self-Employed Is Possible
Now is the time to find a lender who can help with getting a mortgage when self-employed.
You have plenty of loan options that also include programs geared toward self-employed borrowers. For example, some of these will allow you to use alternate income or simply state your income. Your lender can direct you to conventional programs too based on assessing your finances and employment situation.
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