According to the Bureau of Labor Statistics, there were approximately 9.6 million self-employed workers in the U.S. in 2016. By 2026, that number will increase to 10.3 million. If you’re one of these freelancers, you probably enjoy being your own boss and in charge of your own time.
However, it can be much more challenging to get a mortgage when you are self-employed.
Self-Employed Mortgage Lender Tips – What to Know
- You need to have a consistent income — or one that trends upwards. One of the things that lenders are concerned about is that you’ll have sufficient income to pay your mortgage for the life of the loan. You’ll typically have to show two years of consistent or increasing self-employment income, according to The Motley Fool. Note that to prove your income, you’ll have to submit two years or more of tax returns. If you can’t show that, it’s wise to wait a little bit longer until you can.
- A Self-Employed Mortgage Lender will consider your income after expenses. Self-employed individuals typically report as many expenses as possible on their tax returns in order to lower the amount of taxable income they have. However, a self-employed mortgage lender will only look at your income after expenses — and if that’s too low, you might not qualify for the mortgage amount you want. So before deducting too many expenses, give some thought to how it will affect your mortgage application.
- Be mindful of your debt-to-income ratio. U.S. News reports that lenders want to see a debt-to-income ratio of 43 percent or lower to approve a mortgage. You’ll likely be asked to submit a list of your debts, as well as your assets, with your mortgage application.
- You’ll need to have good credit. Your credit score is important — it has to be good, which is usually a score of 680 or more. In addition, a self-employed mortgage lender will consider your credit utilization ratio, which is how much of your available credit you actually use. Generally, a credit utilization of 30 percent or less is good, and of course the lower it is, the better.
- Prepare for a higher interest rate. Because you don’t have the security of an employment contract, a self-employed lender might consider you more of a risk and charge you a higher interest rate.
- Prepare to make a significant down payment. You’ll need to pay at least 20 percent of the home’s sale price in cash — preferably more.
- You’ll need substantial cash reserves. Lenders will consider what recourse you have in the event your income slows down for a period of time. That means that they’ll want to see substantial cash reserves — at least sufficient to tide you over for between three to six months.
Getting a mortgage while self-employed will challenge you, but it’s not impossible. Especially if you seek out a self-employed mortgage lender with professionals who specialize in home loans for self-employed individuals. If you keep these pointers in mind and prepare accordingly, you stand a good chance of a lender approving your mortgage application so you can buy the home of your dreams.
Contact Peak Finance today to learn more about your options!