Unfortunately, self-employed people are generally seen by mortgage lenders as high risk. The main reason behind that thinking is that the self-employed have less predictable incomes than employed people.
Therefore, self-employed people typically have to meet a higher threshold of criteria from the lender to qualify for a mortgage. However, it’s not all doom and gloom. By using the right tactics, you can still qualify for a mortgage as a self-employed person and purchase your first home.
Wait Until You Have Been Self-employed for Two Years
If you are newly self-employed, it will be much more difficult to qualify for a mortgage. Generally, mortgage lenders require at least two years’ worth of business tax returns before they will consider your eligibility for the loan.
There are alternatives, though. For instance, some lenders specifically provide mortgages to self-employed people. But to broaden your chances of being accepted for a mortgage and to have more choice over which lender you go with and to get a better interest rate, it’s probably best to wait a couple of years before applying.
Improve Your Credit Score
It’s important to know how credit scores affect mortgage rates so you can work on improving your score, if you need to, before applying for a loan.
To get a low mortgage rate, you will need a high credit score along with a low debt-to-income ratio and a strong financial history. While being self-employed shouldn’t directly impact your credit score, you should understand how running your own business can be related to your score.
For instance, some issuers of business credit cards report all of the activity on your account to the credit bureaus that provide credit scores. If you have a credit score of at least 700, you will typically be able to qualify for a lower mortgage interest rate, although it’s still possible to secure a mortgage with a score of 680 or lower.
If your credit score is under 629, it will be much more challenging to qualify for a mortgage.
Read also: How to Pay off Your Mortgage in Half the Time: 14 Money-Saving Tips for Homeowners
Improve Your Debt-to-income Ratio
When a mortgage lender tries to determine whether a self-employed person qualifies for a loan, it takes both your personal financial health and the state of your business into consideration.
Along with your credit score, your debt-to-income ratio is pivotal as to whether your mortgage loan will be approved or not. The standard debt-to-income ratio required by mortgage lenders is 43% or lower.
Improve your ratio, make sure you have proof of income flows, and know every element of your business to help improve your chances of getting the loan.
Consider Different Lending Options
Because it’s typically more difficult to get a mortgage as a self-employed person, you should compare and consider different lending options.
In addition to comparing the big mortgage lenders, consider smaller banks that specialize in more personalized services. Online lenders could also be a good option for the self-employed.
Alternatively, work with a mortgage broker. Choose one who has a history of working with self-employed people so that you stand a good chance of qualifying for a mortgage in your broker’s capable hands.
You could also consider home buying assistance programs run by the state or federal government. But one of the best options for self-employed people who find it difficult to qualify for a standard mortgage is a bank statement loan that is geared toward the self-employed.
If you do not have the W2 forms or pay stubs that are needed to qualify for a mortgage, a bank statement loan could be your best option.