More people now prefer self-employment over the traditional 9 to 5 employment. The major reason behind this is that self-employment offers benefits, such as flexibility, autonomy, and the time to pursue other pursuits. In America alone, there are over 16.2 million people who are self-employed, which makes up about 10.1% of the workforce. This trend shows that people are moving away from conventional means of earning. However, as a self-employed individual, you might be hesitant to buy your own house. Because most banks and lenders often don’t approve self employed loans and mortgages.
Here is a guide that will help you get approved for a loan within no time:
Borrower Checklist:
As the borrower, you will have to fulfil certain requirements that will make you eligible for housing loans and mortgages, as conventional banks ask for complete proof of income, valid tax returns, W2s, and paychecks. All these documents are unavailable for you as you don’t have a steady following of income. But not to worry, you can still apply for self-employed loans when you fulfil the requirements.
- Tax Returns: By providing your business and personal tax returns, you show that you have been successfully filling your taxes. This gives the lender some confidence and they can assess your net business income. You might be asked to submit tax return documents for the past 2 years.
- Debts and Payments: If you have any pending debts or monthly payments, you must declare them at the time of loan procurement. You must also disclose any other additional debts as they might affect your eligibility. You will be either asked to disclose your bank statements for the past 24 months or 1 year bank statements with 2-year tax returns.
- Declare Your Assets: Lenders are hesitant to lend to self-employed individuals. But if you have sufficient funds for a down payment and have some investment and savings, it can greatly increase your chances.
- Business Documentation: You might be asked to show your balance sheets, which act as a snapshot of your business expenses. You will also be asked to show your profit and loss statements.
- Additional Income Resources: If you have secondary or passive source of income such as rental property, alimony or social security, then it is in your better interest that you disclose this information. As it will increase your eligibility.
- Current Housing Payments: You might be asked by the bank to show proof of current mortgage or rent payments. This can be in the form of cancelled checks or payment receipts.
- Verification of Your Business and Employment: As a self-employed borrower, you must have solid proof that you own and operate a verified business. This shows your creditworthiness and increases your chances of loan procurement.
Lender Requirements:
Lenders such as banks, credit unions, mortgage brokers and online mortgage lenders are often reluctant when it comes to approving self employed loans. They have certain fail safes in place. The lenders also want to see how willing you are to repay the loan amount. By taking the following prerequisites into consideration, you will take these lenders into your confidence.
- Increase Your Credit Score: One thing that will make the loan process carry out smoothly is a great credit score. As a self-employed borrower, this is even more crucial for you. You must either have a great credit score of 800 or a relatively good one of 670. Because having a good credit score will fast-track your process as it gives the lender confidence in your ability to repay your loan.
- Proof of Stable Income: Self-employed borrowers do not have a streamlined means of income. But it doesn’t mean they don’t have a stable income. These two are not parallel to each other. By giving adequate proof of consistent and increasing income is a great sign for lenders. Therefore, make sure that you have your income receipts and bank statements in order before handing them over to the lenders.
- Adequate Funding: In addition to your down payments, lenders would also like to see some proof that you have some cash reserves saved for emergencies. Making adequate funding in your accounts that can cover a year’s worth of mortgage payments is a good idea as it makes you a more attractive borrower.
- Debt to Income Ratio: When applying for a loan or mortgage make sure that your DTI is less than 43%. The lower the Debt-to-Income Ratio, the better are your chances of securing self employed loans.
- Steady Work: Steady work means steady income. Providing proof that you have been getting a steady stream of work in the past is a good place to start. It assures the lender that you will continue to work in the future as well.
- Upfront Down Payment: You don’t necessarily need to pay 20% of the down payment but if you are able to pay a sum closer to this percentage it increases your chances of getting a housing loan.
Find A Proper Guide:
The process of procuring self-employed loans or mortgages can be quite a daunting task. Especially as a self-employed borrower, your chances are slimmer. But that doesn’t mean you should lose hope. Nowadays, there are many mortgage lenders, such as Dream Home Mortgage, that cater to self-employed borrowers. Because they are mortgage lenders, you don’t need to disclose any W2s, tax returns, or pay stubs. With tailored programs, they provide competitive interest rates, the lowest closing costs and no hidden expenses. And if you have a low FICO score of 580, you need not worry. You can choose any of these options, such as cash-out mortgage, reverse mortgage, Jumbo mortgage, conventional, FHA, VA loans and construction loans. With free and easy consultation services, Dream Home Mortgage is your best bet at securing home ownership.
