Taking out a mortgage on a home is a significant financial decision, but it can seem even more daunting for those who are self-employed. Those who work at businesses of their own making already need to adjust to new ways of managing their finances, such as paying both the employer and employee portion of taxes.
Acquiring a mortgage and being able to demonstrate a solid and reliable income may make some feel as though they are unlikely to succeed in a mortgage application. However, self-employed people can see great success in acquiring a mortgage as long as they go about the process wisely.
Mortgage Requirements To Keep In Mind
Regardless of your employment situation, mortgage lenders generally have a list of things they will evaluate before deciding that you are a suitable candidate for a loan. Consider factors such as your own income stability, the general financial wellbeing and longevity of your business, how you plan to continue to create income and where you are located, as well as what type of business you manage.
These details can provide information about the likelihood that you will continue to thrive financially and be able to repay your mortgage. If you cannot demonstrate solid answers in these fields, you may struggle to secure a mortgage, or it may not be with the terms that you were hoping for.
Specific Documents For Self-Employed People
Lenders may ask for a wide variety of documents that substantiate your claims. However, self-employed people will need to be thorough and diligent in supplying their documentation; you can begin with a history of your income from your business.
Typically, at least two years is required, and those who have not been in business for at least two years are less likely to find success. If you are struggling to meet the two year requirement, you may need to provide information about your education and training that proves that your business is well founded and likely to succeed.
Mortgage lenders will also expect proof that you are in fact self-employed. You can fulfill this requirement in a number of ways, depending upon how your business is structured and what services it provides. If you have a “Doing Business As,” you can submit this as proof. Other types of acceptable documentation include business licenses, insurance for your business if it is needed or even emails and proof of communication with clients.
In addition to simply proving that you are self-employed and that you have earned income in the last two years, you will need to offer an in-depth look at your finances. This can be achieved by making copies of your W-2s and other personal tax forms, as well as profit and loss forms. These can be Schedule Cs, K-1s or another type of tax document, depending on how your business is set up.
Manage Aspects That You Can Control
In the end, a lender will need to make an independent decision about your financial stability and likelihood of defaulting on a mortgage. However, there are some aspects of the process that you can control in order to alter the process in your favor.
Evaluate your debt to income ratio and pay down debts prior to taking a mortgage if possible. If your debt to income ratio is 50% or greater, you may be considered a substantial risk and could see less advantageous mortgage terms or even downright denial.
It is also important that you consider how you have structured your finances. Keep your business expenses separate from your personal accounts; it may be tempting to use a personal credit card to make occasional business purchases, but this can skew your credit utilization.
Similarly, consider how you may be able to improve your credit score in general. Credit utilization, past due payments, the number of accounts and their age and many other factors will all contribute to your credit score. If you can make changes here to boost your number, you may see more success with a mortgage application, self-employed or not.
Work With Mortgage Professionals To Navigate The Process
Whether you are self-employed and wondering how to boost your chances of success with a mortgage or you are lost with how to begin the process of securing a loan, it is important that you work with professionals who have your best interests in mind.
Fairfax Mortgage Investments would be happy to evaluate your financial situation and help you develop a strategy that maximizes your chances of securing a mortgage as a self-employed individual. Reach out to schedule an appointment to discuss your options, challenges and goals for a mortgage.