When it comes to obtaining a mortgage, there is an excessive amount of misinformation out there regarding self-employed individuals, which is why we wanted to set the record straight. After all, there are no special requirements that make it harder for self-employed people to get a mortgage. You are held to the same standards for credit, debit, down payment, and income as ‘traditionally’ employed individuals are.
Acquiring those documents is where it can get tricky as a self-employed professional. Proving your cash flow as a business owner can require more paperwork than for W-2 employees. But don’t let that defeat you. If you meet loan guidelines and put in the work to show reliable cash flow, being self-employed should not stop you from buying a home or refinancing.
So, what can you do to help get yourself approved for a mortgage? Do your homework by following these five tips to help you get approved for a loan.
1. Look at your past two tax returns
In order for lenders to calculate your monthly income, they will take a look at your tax returns to find your adjusted gross income that is on each form. They will take that number off both returns, adding them together. Then they will divide it by 24, giving them your average monthly income for the past two years. It is also beneficial to have your W-2’s including when you bring your tax returns.
If you want to get an idea of what this number is for you, you can easily do so, and it will help you determine how much of a loan you will qualify for in the end.
2. Support Your Mortgage Application with a Strong Credit Score
A high credit score will make your mortgage-qualification process easier and help you qualify for a mortgage with a competitive interest rate. Once a year, you can view your credit report for free, and we want to encourage you to do just that. When you review your credit history from a bureau, you can find inaccurate information that you can work to resolve.
Keep your credit score high by paying your bills on time and keeping your debt-to-income ratio low. You can do this by not opening too many new credit accounts in the six months prior to applying for a mortgage.
3. Reduce Your Debt-to-Income Ratio
We all know that lenders approve you for a mortgage based on your income and creditworthiness. Most lenders will only allow you to borrow a specific percentage of your income, known as a DTI or debt-to-income ratio.
When it comes to your debt-to-income ratio, lenders will look for two numbers.
- Front End Numbers: Your housing-related debt payments should not exceed 30% of your income.
- Back End Numbers: This number focuses on your total recurring debt payments, including housing, student loans, credit cards, car loans, child support, and alimony, and should not exceed 40% of your income.
- These percentages adjust based off the mortgage type you are applying for. The Loan Officers at Welch State Bank will be able to assist find the best mortgage type to meet your needs.
To qualify for the best mortgage rates, it is important to reduce or eliminate any other debt payments you may have such as a car note, or credit debts. By doing this, you will improve your DTI ratio, thus allowing you to qualify for a larger loan.
4. Have a large down payment and significant cash reserves on hand to cover mortgage payments
The higher the equity of a home, the less likely a borrower is to walk away from the home during times where there may be a financial strain. Because of this, a bank will see a borrower as less of a risk if they are able to put a lot of cash into a home purchase upfront.
In addition to a large down payment, having plenty of money in an emergency fund shows lenders that even if their business doesn’t do well for an extended period of time, the borrow will able to continue making monthly payments.
5. Provide Documentation
Being willing and ready to fully document your income through tax returns, profit and loss statements, and balance sheets will increase your chances of qualifying for a loan. Your lender may ask for some or all of the following information from you:
- List of Debts and monthly payments
- Bank statements
- List of assets (savings accounts, investment accounts, etc.)
- Additional sources of income (alimony, social security, etc.)
- Proof of your business’ status (business license, a statement from your accountant, etc.)
The mortgage specialists at Welch State Bank can help provide you valuable guidance and insight so that you can:
- Apply based on your true earning power.
- Get a competitive mortgage rate to maximize your purchasing power.
- Finance the purchase of a new home, renew your existing mortgage, or borrow against your home equity.
Developing a long-term relationship with the mortgage specialists at Welch State Bank can help your mortgage application process. The more we are able to understand your business and finances, the better we can understand your ability to service your debt and get you the mortgage you deserve.
Are you ready to start your loan pre-qualification process? We would love the opportunity to be a part of your home buying experience, and we offer every type of Home Loan product available. Our lending experts will be with you every step of the way, offering you a one-on-one customer service focused experience while making your new home purchase simple and stress-free. Come see why Welch State Bank has been voted “Best Mortgage Lender in Ottawa County” since 2003 by the readers of the Miami News-Record, and let’s work to get you pre-qualified today!