You may be familiar with the typical mortgage application and the employment requirement. But what if you own a business, are self-employed, or work freelance? This can make it a bit more challenging to secure your next home loan.
Although challenging, this doesn’t have to be a roadblock. Non-traditional employment structures are becoming more common and most lenders are embracing this trend by providing more flexibility in their application process. Still, lenders want assurances that self-employed borrowers, like all applicants, have good credit, some collateral, and can make their mortgage payments consistently for the life of the loan.
Here are some tips to help convince lenders that you are a strong loan applicant.
Work toward a stable or growing income
Ideally, lenders want to see at least two years of self-employment income in the same industry. If you’re newly self-employed, some lenders will make an exception if you have one year of self-employment as well as W-2s from an employer in the same field. A longer history of successful self-employment gives more confidence in your future earnings.
Boost your credit rating
A strong credit score (720 and over puts you in the excellent range) will go a long way in helping you secure a mortgage. Lenders want to know that you are reliable in paying back your debts. Things like foreclosures, late payments, collections, repossessions, etc. can damage your chances of securing a loan. Know your credit score and work toward building it up to be as strong as possible.
Build a solid savings
When you are self-employed, you may have some months that bring in a lot of business income, and others that don’t. It’s important to show lenders that you have enough money saved up to make your loan payments when business is slow.
Aim for a higher down payment
The down payment requirements won’t change based on your self-employment but offering a higher down payment can help sway lenders if your application is on the fence. Providing a down payment of 30% or more can help assure lenders that you are good for the loan.
Look for a single-family, primary residence
A mortgage on a single-family home that will be your primary residence is a lower risk property for lenders to back than a second home, investment property or multi-unit structure.
Gather your documentation
When you’re self-employed, be prepared to submit financial information for yourself and for your business. Requirements will vary per lender, but you should be prepared to submit the following:
- Complete personal tax returns for two years
- Business tax returns for two years
- IRS Form 4506-T, giving permission to the lender to request transcripts for tax returns
- Profit and loss statements
- Business bank statements
- A business license
- A list of your debts and minimum monthly payments
- Canceled checks for your current rent or mortgage
- Any additional income or payments, such as Social Security or disability
- Business verification, such as a DBA or “doing business as”
If you’re self-employed and know you are going to want to buy a house eventually, wait until your business has been consistently profitable for two or three years so you can show a track record of success. Over that time, work to improve your credit score if needed, pay down any existing debt, and save as much as possible to put yourself in the best position to obtain a loan.