Self-employed has many benefits like you can when and where you want, and you don’t have a boss looking over your shoulder. But, it also has some drawbacks like when it comes to approval of a loan, mortgage approval is difficult. But, it doesn’t mean you cannot get approved. You have to consider some important things before you apply for a mortgage.
There is no doubt; it is harder to qualify for a mortgage loan when you are self-employed. But, as nothing is impossible, there are ways which help individuals to get qualified for a mortgage. The mortgage process is a little bit different when you are self-employed. It generally involves a lot of documentation, and qualification can be more difficult.
- Income: Mortgage lenders typically look at your income before approving loan. So, to make sure you can easily pay off your loan you are required to show your income. If you earn steady flow income than your chances of getting loan get increased because a steady income gives confidence to a lender that you can pay off loan on time. When you are self-employed, your income will be fluctuate, so here you need to show you the last 2 years income to a Seattle mortgage lender to prove that you have a steady revenue stream.
- Credit: Since income is always considered an issue with the self-employed, mortgage lender typically look for a minimum credit score of 620. If your credit score is 620, then you may get a loan from the mortgage lender. Keep in mind, credit score more than 700 will be a big advantage.
- Assets and Down Payment: The down payment is also more important with self-employed. Lenders are typically looking for the large down payment from the self-employed as compared to salaried borrowers.
- Documents you need to provide: Getting a mortgage as a self-employed borrower required a bit documentation such as 2 years of personal tax returns, 2 years business tax returns, year to date profit, and loss and balance sheet, year to date business profit and loss statement, most current 2 months business and personal bank statement, audited financial for years to date income and IRS 4506 transcript request form.
- Interest Rate: Whenever you take a loan from the mortgage companies first thing you need to compare their interest rates. The greater the interest rate, the more you can expect to pay per month and over the lifetime of the loan. Pick the mortgage lender whose interest rates are relatively lower than others.
- Income tax VS Interest Rate: Most self-employed declare expenses to lower down the income tax. However, this is not the best way to deduct taxes. You, mortgage lender, will check your income to debt ratio. Ideally, this figure should be lies between 35-40%, respectively. But, if you are deducting your expenses to lower your taxes, your income to debt ratio will be increased. If your income to debt ratio is low, the lender will offer you the loan at the low-interest rates.
- Don’t co-sign other loans for anyone: When you co-sign, you are committed. As we referenced, with that commitment comes higher proportions also. Regardless of whether you swear you won’t be the one making the instalments, your bank should count the instalment as a detriment to you.
We hope, now you understand how to get a mortgage loan when you are self-employed. So, if you are looking for buying a new home, keep your income, assets and credit stable to prove that you are an ideal buyer for a mortgage loan.