How Do You Get Approved for a Mortgage When You Are Self-Employed? Can you own a house if you are self-employed? Mortgage lenders don’t worry about where your money comes from. They just want to know that you can reasonably pay your mortgage payments on time.
More self-employed people own homes than salaried people. In 2016, 62.7% of people who lived on a salary owned a home. Among the self-employed, mortgage holders made up 72.9% of this group.
Self-employed clients have a variety of options when looking for a mortgage. Keep reading to learn more about how a business owner can get a mortgage.
Is it Difficult to Get a Mortgage if Self-Employed?
In short, it can be if you don’t know which mortgage lender to approach. A good mortgage broker who specializes in working with self-employed borrowers can help. In this article we will explore both the options and challenges of getting a mortgage when self-employed.
Some people believe that self-employed clients will have to pay a higher down payment or pay a higher interest rate. This is not always accurate.
While it is true that many large banks can scrutinize self-employed borrowers more than other applicants there are many lenders who welcome the self-employed. In fact, there are a number of niche lenders who deal almost exclusively with entrepreneurs and the like.
There are basic requirements for anyone who wants a mortgage. But, if you know which lenders to approach, the process doesn’t have to be complicated. Nor do you have to look like the perfect applicant. Both credit and income challenges may represent a problem at one of the big banks but niche lenders understand the trials and tribulations of running your own business. Moreover, they expect to see imperfect applications.
The key to getting an approval as a business owner is to work with a mortgage broker who specializes in self-employed mortgages.
How to Show Proof of Income if You Are Self-Employed
Mortgage companies require recent pay stubs and a letter of employment for people who hold standard jobs. Determining the income of someone who is a business owner is different. Self-employed income can vary from month to month.
Most big banks determine proof of income for self-employed workers in two ways. The mortgage lender will average out income from the past two years. If the most recent year’s income is lower than the average, they will take that instead.
Alternatively many alternative lenders will look at a number of different ways to verify income. In fact, many lenders will even allow many borrowers to “state” their income. Essentially the borrower signs a declaration stating how much money they make, rather than proving it by way of notice of assessment. Most lenders who underwrite mortgages for self-employed borrowers use a common-sense approach which leads to more approvals, rather than just looking at the numbers.
Build Your Credit Score
As a self-employed person, once they have looked at state-income, mortgage companies will consider your credit score. A good credit score can go a long way to helping you get a self-employed mortgage. Your credit score helps to determine how much risk is involved for the potential lender.
You can build up your credit rating by always paying off your credit cards in full each month. Use credit cards regularly, but try not to put more on them than you can afford to pay off at the end of the month.
Minimize Tax Deductions
Many self-employed people take advantage of the write-offs and deductions they can make on their taxes to lower how much they have to pay. This leads to a tax loss. When you apply for a mortgage, a tax loss can hurt you.
If you know that you are going to buy a house in the next couple of years, remember that you do not have to claim every deduction. You can even amend previous years’ taxes to shower a higher income. Work with a tax professional to minimize the amount of taxes you will owe.
Using a Down Payment to Get a Self-Employed Mortgage
If you are self-employed and want to buy a house, you need to plan. In the years before you plan to buy a house, saving money is critical.
Having a substantial down payment helps. If you can show that you are responsible enough to save money for a good down payment, mortgage providers will be more likely to see you as low risk. Aim for a 15% down payment or higher.
As well as a down payment, you should have emergency savings. If you have the money to support your business if you have a couple of bad months, lenders feel assured that you will not default on your mortgage. Try to have 3 months or more worth of expenses saved up.
If you’re self-employed, mortgage lenders will give you pre-approval for a specific amount if you have fulfilled all the requirements. This will give you a better idea of the price range for a house that you could be approved for.
Self-Employed Business People Can Own Homes
If you’re self-employed, mortgage lenders can help you get into a home of your own. Our goal is to help you meet your goals in homeownership. We can help match you with lenders that specialize in helping self-employed people get mortgages.
Call us today to get started on becoming a self-employed homeowner!