In theory, applying for a loan as a self-employed person is no different than applying as someone with a W-2. You should be held to the same standards of debt-to-income ratio and credit score, and assessed in the same way. However, in practice it can be much more difficult for those who own their own business to demonstrate their financial trustworthiness to the bank. But don’t stress! Getting a mortgage when you are self-employed is absolutely possible. Consider the following to help you get started finding the best mortgage for you.
Documenting income
One of the biggest challenges for entrepreneurs and other self-employed people in applying for a mortgage is demonstrating their financial stability. Banks want to see that not only is your business successful and your income strong but that it’s likely to stay that way for the foreseeable future. This can be proven in a variety of ways, including through profit/loss forms, personal tax returns, or even letters from current clients. If you use a program like QuickBooks, it should be easy to produce records of your financial success.
Alternative loans may be the answer
If you find yourself unable to provide some of the proof above, it may be time to consider non-traditional loans. Non-QM loans such as asset-based loans or bank statement loans allow you to apply without the same level of income verification. These loans are ideal for someone who owns their own business or someone who works in the gig economy for companies like Lyft or DoorDash. Some of the best bank statement mortgage lenders require just 12 months of regular deposits to qualify. They then use this information to assess how much money you can borrow and your ability to pay that money back. Side note: If you already own your own home, this type of income verification can be used to refinance as well.
Put together the best application possible
There’s no way to avoid it. When applying for a loan your finances will be scrutinized, especially as a self-employed person. Two aspects of your money that banks are particularly interested in are your debt-to-income ratio (DTI) and your credit score. When considering applying for a mortgage, working on both of these will allow you to put your best foot forward.
Optimizing your DTI
Your debt to income ratio is essentially the percentage of your income that regularly goes to debt payments. This is important to lenders because it helps them assess how much debt you already carry and how much more they believe you can handle. You can make yourself more attractive as a borrower by lowering this percentage. One way to do this is to pay down your debt before you apply for a loan. For seniors age 62 on limited income, you may want to explore the federally insured HECM (Home Equity Conversion Mortgage) insured by HUD. Residual income requirements are much less than traditional DTI requirements.Reverse mortgages come with downsidesso be careful to read the fine print and consult with your trusted advisor before entering any contracts. Another way to lower your DTI is to increase your income. For this, you may need to automate parts of your business or increase your client base, so that you have more money coming in.
Raising your Credit Score
Another important aspect of your finances that lenders will look at is your credit score. This is a score given to you based on your habits as a borrower, by looking at several facets of your credit history such as on-time payments and utilization percentage. One way to bring up your credit score is to increase your credit limit by taking out a new credit card which will increase your credit limit and lower your credit percentage utilized by comparison. Automating payments, so that you make consistent, on-time payments on your credit cards can help as well.
As a business owner, you are already used to staying organized in order to make your money work for you. Use the factors on this list to present yourself as best as possible and you will get the mortgage you need in no time.