Six Mortgage Tips for the
It's no secret that mortgage lenders are requiring more information from
potential borrowers than they did prior to the 2008 financial meltdown. But for
self-employed borrowers, qualifying for that mortgage loan is particularly
difficult. In the past, self-employed business owners were easily approved for
stated-income mortgages – or, loans that didn't require tax documents or bank
records to verify income.
But because of more stringent lending policies, self-employed individuals in
particular can expect far more scrutiny than in the past. In particular,
lenders are looking for proof of stability, or a pattern of income. Fair or
not, the self-employed are not considered as "safe" a bet as someone
on an established salary.
Simply stated, lenders want to establish that the borrower can sustain a
mortgage over time. Accordingly, lenders are likely to require at least 2 years
of the most recent tax returns as well as financial statements, and possibly a
quarterly profit loss statement. In their assessment of finances, lenders will
typically require an overall debt-to-income ratio of 41 percent or less, though
some will be less stringent depending on other factors such as excellent
credit. Speaking of credit scoring, because some lenders consider self-employed
borrowers a higher risk, it is possible to offset that risk with a high credit
score. A score above 740, for example, can greatly enhance a self-employed
applicant's chances for approval. For self-employed applicants, the secret to
success is to prepare in advance.
Here's what you can do to increase your chances for success:
1. Pay-off your debts
Since your debt-to-income ratios will be considered, paying off some of
those liabilities can lower your levels to acceptable proportions.
2. Get your credit report in advance
If there is anything negative in your credit history, take action to correct it
before you apply for a mortgage. And, in the process, make every effort to
raise your score above 740.
3. Adjust your income accordingly
Self-employed business people are typically very aware of beneficial tax
deductions that will reduce their amount of taxable income. The problem is,
lenders will determine your eligibility for a loan based on your taxable
income! With a deflated taxable income, it's entirely possible that you'll
qualify for a loan that's far below what you need. So, a year before you're
ready to apply for a mortgage, talk to your accountant and see how to maintain
quality deductions, while also taking a high enough income. One solution may be
to defer certain expenses to a later tax year. In fact, deferment of expenses
can also enhance financial reserve levels. Remember, lenders are looking for
stability – or, your ability to pay over time. Your cash reserves will be a key
4. Meet with your potential lenders face-to-face
Online or telephone-based lenders are extremely convenient, but for the typical
challenges that confront the self-employed applicant, it's better to meet with
a specialized loan officer in person. Specialized experts are far more likely
to direct you to a loan package that meets your specific needs.
5. Consider a joint mortgage
If you're married to someone who draws a regular paycheck on a W-2, consider
having them apply as the primary applicant – with you listed as the secondary
6. Make a bigger down payment
Lenders tend to believe that with a greater personal investment, the borrower
is less likely to default. In fact, some lenders will actually require
self-employed applicants to submit a down-payment of at least 20 percent.