How Do I Get A Mortgage If I'm Self-Employed?
We know that getting a mortgage as a self-employed individual can be more challenging than a W2 employee. This is not a reason, however, to let go of your dream to own a house. Follow our tips below for a smooth mortgage approval experience as a self-employed home shopper.
What Lenders Are Looking For In A Self-Employed Borrower?
Self-employed home buyers submit the same application forms as everyone else, the only difference is lenders have more rigorous requirements when it comes to proof of income.
In regards to your self-employed income, you’ll need to prove the following:
• Business stability
• Nature and location of your self-employment
• Financial strength of your business and its ability to generate sufficient income for the foreseeable future
To increase your chances at approval you’ll need a history of continuous self-employment income for at least two years. The following documentation would be the best to provide with your application:
Employment Verification
This serves as proof that you’re self-employed. It can include emails or written documents from the following:
• State or business license
• A licensed CPA(certified personal accountant)
• Current clients
• Membership in a professional organization
• Proof that your business is insured
• DBA or Doing Business As
Income Documentation
Showing proof that you have steady, reliable income will move you a step closer to loan approval. Make sure to prepare the following documents and submit them with your application:
• Personal tax returns (If paid through your corporation, include W2s)
• Profit and loss forms (may include a Schedule C, K1, or Form 1120S, where applicable)
Tips to Become an Attractive Candidate
Making yourself more attractive to the underwriter is a key to getting loan approval. Here are great ways to help you put your best application forward.
Have a Good DTI Ratio
Your DTI involves the percentage of your gross monthly income that goes toward monthly debt payments. A low DTI score will give you a better chance of getting a loan since this proves that you are a less risky borrower.
Calculating DTI is done by dividing your monthly recurring debt by your monthly income before taxes. The standard DTI requirement is 43% or lower. If you have a DTI of more than 50%, consider reducing it before applying.
A High Credit Score
Higher credit scores boost your chances of getting mortgage approval as it provides proof of your ability to repay your debts. High scores also help you qualify for lower interest rates.
Owning a business should not directly affect your scores unless you have a personal loan or line of credit.
Make Business Expenses Separate
Having a single account for your personal and business purchases can increase credit utilization, impacting your application negatively.
It would be best to charge business purchases like office supplies and new computers to a separate business account rather than your personal card.
Ready to Apply For a Loan?
It is common to get asked for additional documentation before a loan is approved so don’t get discouraged if your application takes a little longer to close as compared to your employed counterparts.
As long as all the "ducks are in a row," you have an excellent chance of getting approved for the amount you need and at a favorable rate.
We can help! Our experienced loan professionals can assist you in gathering all the required documentation to put you in the best position for fast closing.
Give us a call or send us a message on our website today.