Being approved for a mortgage can be challenging enough if you’re an employee, but it can be even harder to get a mortgage if you’re self-employed and don’t have a steady income to convince lenders of your ability to make the necessary payments. Being considered a risky lending proposition can result in higher interest rates because you’re considered to be a less attractive candidate for a mortgage. While it’s true that your mortgage options are more limited as a self-employed individual, it’s by no means impossible to get on the property ladder. Here are some things to expect if you’re looking to get a mortgage while you’re self-employed.
Be prepared to document your income. In the past, low documentation loans such as Stated Income/Stated Asset (SISA) mortgages made it possible to get a mortgage without having to verify how much you were earning through self-employment. Because these type of mortgages are much less common now, be prepared to provide a breakdown of your self-employment income. This can include tax returns for at least the last two tax years, profit and loss statements and a balance sheet, as well as details of your clients and any investments that you’re earning income from. This gives lenders a much clearer picture of your financial situation, which means that you can receive lower interest rates because you’re deemed to be less of a credit risk (assuming that the information provided satisfies your lender). It’s likely that you’ll be required to file one of either IRS Forms 4506 or Form 8821. The former means that your lender can request a copy of your tax return from the IRS. This costs $39 for each tax return that is requested. The latter is free and gives lenders permission to visit an IRS office and take a good look at your tax records for the relevant tax years.
Joint mortgages. It can improve your chances if you’re taking out a joint mortgage with a W-2 employee. Because there is one steady income that can be relied upon, lenders have greater confidence that you won’t default on your mortgage payments and can look on your self-employed status more favorably.
Offer a bigger deposit. Putting down a larger down payment decreases your mortgage payments, which can make lenders less afraid that you’ll default on payments. For the self-employed, a down payment of at least 20% is recommended and some lenders may even specify this as a requirement before they’ll approve your application.
Have a good credit score. When it comes to loans and mortgages, a good credit history works in your favor. Lenders regularly offer better interest rates to candidates with attractive credit scores, because they’ve demonstrated an ability to handle debt and are considered to be less of a liability with credit.
Getting a mortgage when you’re self-employed can be much harder than it used to be now that low documentation and no documentation loans are less readily available, but you don’t need to give up your dream of being a homeowner just because you don’t earn a steady paycheck. Be prepared to provide proof of your income and don’t be surprised if you’re offered interest rates that are higher than you’d like. This is typical of a self-employed mortgage, because you’re deemed to be more of a risk than a W-2 employee. Offering a bigger down payment and having an excellent credit score can reduce your interest rate. Not having these doesn’t mean that you won’t be approved for a mortgage, but expect to be charged more interest. This is obviously a downside, but don’t automatically let it prevent you from applying for a mortgage while you’re self-employed. The one upside to being self-employed is that your income is limitless and typically, the more you work, the more you’ll make. However, banks don’t always see it this way, so you’ll need to work a little harder to get a prime interest rate on a conventional loan.
(photo credit: R.Clock)