Self-employment can sometimes make it trickier to secure a mortgage on your property. However, it is not impossible. There are mortgages for you available as well as steps you can take to make yourself a more attractive loan candidate.
Being self-employed, lenders may not see you as the ideal borrower. Expect to pay higher interest rates than the ones commonly advertised on mortgage websites. Those rates are for prime borrowers, or borrowers who are considered to be particularly creditworthy because of their steady, verifiable incomes and excellent credit scores. Similarly, banks may want to see a lower loan-to-value ratio (LTV ratio), meaning that you’ll need to come up with a larger down payment. You may also have to put more effort into finding lenders who are willing to work with you in the first place.
The biggest pitfall self-employed individuals face when securing a mortgage is having a lack of proof of income in the form of tax records. If you are not an employee, you will not have a regular W-2 paystub that allows you to prove your earnings. You will likely receive your income from a number of different sources which can be difficult to track. Also, your income or the profits from your business will fluctuate over the years, making it even more difficult for the mortgage lender to assess.
This is why keeping your personal tax returns up to date and filed on time will be very helpful in ensuring that you are able to obtain a mortgage. You should have accurate records from as recent as 18 months or less and you should be able to show that you have at least two years’ worth of your company’s tax returns or accounts. You might also need to provide proof that you have ongoing work lined up in the future to maintain your income. Working with a certified accountant can help you to organize these records.
Another problem you may encounter is that if you’ve used lots of business expenses to reduce your taxable income on your tax returns, lenders may wonder if you make enough money to afford a home.
Other Mortgage Options when you are Self Employed
- Stated Income/Stated Asset Mortgage (SISA)
This type of mortgage is based on what you tell the bank your income is; the bank will not seek to verify this amount. Stated income loans are sometimes also called low-documentation loans; this is because while lenders will not verify how much you make, they may seek to verify the sources of your income. Be prepared to provide a list of your recent clients and any other sources of cash flow, such as income-producing investments.
- No Documentation Loan
In this type of loan, the lender will not seek to verify any of your income information. This may be a good option if your tax returns show a business loss or a very low profit. Because it is riskier for the bank to lend money to someone with an unverified income, expect your mortgage interest rate to be higher with either of these types of loans than with a full-documentation loan.
While many self-employed individuals may choose one of the above options due to the difficulty of sufficiently documenting their incomes, those who can prove their incomes and who are willing to submit the extra paperwork can still apply for full-documentation loans, which will have much lower interest rates.
More Helpful Tips on Securing a Mortgage
- Having a significant amount of money in your savings account can really help you increase your chances of getting approved for your home mortgage. The more you have in savings, the more likely you will be able to qualify for a lower interest rate. If you don’t already have an emergency fund saved up, you should consider starting one before you try to qualify for a mortgage.
- Getting a joint mortgage with a co-borrower who is a W-2 employee, such as a significant other, spouse, or trusted friend, is another way to improve your prospects of getting approved for a mortgage if you are self-employed. This provides more assurance to your lender that there is a steady income to pay back the debt.
- Finally, a parent or other relative might be willing to co-sign your mortgage loan. Keep in mind that this person will need to be willing and able to assume full responsibility for the loan if you default.
Obtaining a mortgage on a property can be more challenging if you are self-employed, but it happens all the time and you can make it happen too!