Are you self-employed looking to purchase a home in the next 6 months to a year? Applying for a home loan while self-employed is a bit more complicated but not impossible. Lenders want to ensure that you will be able to pay back your mortgage and meet their strict debt to income ratio. But unlike people who are issued a W-2, lenders, such as Associates Home Loans, can easily see that your income is somewhat predictable over the years.
Over the years that I have been self-employed, my income varies year to year. But even if your income varies year to year, that doesn’t mean that you can’t qualify for a mortgage. Let’s take a look at some ways to improve your chances of getting a mortgage while self-employed.
Report All Income and Expenses
Always keep a detailed record of your income and expenses for your business. You will need these records to report your income to the IRS correctly. Lenders rely on the information that you submit to the IRS to determine if you qualify for a loan.
Expenses can help you decrease your taxable income but lenders will take the expenses into account when they are determining how much loan you can take on. So before you start looking at getting a mortgage, take a good look at your income vs expense so that you can determine your net income.
Then carefully determine your debt to income ratio based upon your net income and your current bills. Lenders typically like to see your debt to income ratio around 43% in order to approve you for a mortgage.
Another problem that you could face when applying for a mortgage while self-employed, often times as your business grows and you experience tremendous growth rapidly. Running out and getting a loan after this huge growth can trigger an alarm for lenders. Typically, lenders want to see two to three years of self-employment income before determining the loan amount that they are willing to lend. Don’t be surprised if they do an average of your yearly income.
Start paying yourself as a W-2 employee instead of taking an owners draw. Paying yourself a monthly stable salary can help improve your chances of getting a home loan while self employed.
Pay Your Bills on Time
Always pay your personal and self-employment bills in a timely manner. Late payments can trigger a red flag to a lender that you may have cash flow issues from time to time. You don’t want to give them that impression. Also, now is a good time to take a look at your debt and see if you can pay off any debt prior to applying for self-employed home loan.
Build an Emergency Fund
Self-employment income can vary greatly from month to month so it is super important to have a emergency fund to cover 6 months worth of bills prior to applying for a self-employed mortgage. Anything can happen, just like with the recent events with the Coronavirus, and people who live paycheck to paycheck often aren’t prepared for emergencies.
Having 6 months income will allow you to continue to be able to pay the bills while you come up with a plan on how to increase your business income or go back to a traditional job, even temporarily.
Plan to Put More Money Down on a Home Loan for Self-Employed
Be prepared to make a larger down-payment compared to most homeowners, especially first-time homeowners who often qualify for a mortgage with a 3% down-payment. Even applicants with good credit may have to put down a significant down-payment if income requirements are being close to the minimum income requirements. Plus, the more money that you can put down on a home, the lower your payment will be. This can make a huge impact when it comes to being able to afford your potential loan payment.
You May Need a Co-Signer
Qualifying for a home loan for self-employed can be discouraging if you don’t quite meet the income requirements needed to get a home loan. Another option that you may want to consider, adding a co-signer to your application. A co-signer can help prove the ability to repay the loan back in the event you don’t earn enough income from self-employment.
Having a co-signer can help you get approved but if you think you may struggle to make the payment at some point in the next year or two, you should possibly reconsider your loan application. You don’t want to put a co-signer in the position of having to cover your home loan if you are unable too, unless its a spouse.
Buying a home can be stressful but if you follow these tips you can apply for a home loan for self-employed without too many hiccups. I know that I want to buy the home I am in in the next year hopefully. But with the cornovirus, things have been slow all the way, but small self-employed businesses are hurting the worst. But it won’t last forever. Keep you chin up and focus on how to improve your financial rating during the tough times.