As more people choose to create work for themselves rather than become employees who generate income for other people, questions can arise about how to buy a home. There’s something of a misconception out there that self-employed people have a more difficult time being approved for mortgages. While you may need to supply documentation that’s a little different from someone who works for an employer, there are lenders who are glad to talk with you about a mortgage for self-employed people. Before you begin those discussions, make sure that all of the following is in place.
Proof of Consistent Income
You will need to provide proof that your income is fairly consistent. This can be done by generating reports that confirm your collected revenue per month, including the sources. You can also use the forms supplied by your clients at the end of each calendar year. Finally, your tax returns will also help prove the amount of income that you generate.
Keep in mind that while all of these confirm your gross income, many lenders will be more interested in how much you net during an average month. That means you will need to supply documents that detail the amount of taxes you pay, as well as any business expenses related to your operation. The amount that’s left serves as your net income and will often be the focus of the lender’s attention.
An Acceptable Debt to Income Ratio
No one expects you to be completely free of debt. However, lenders do want to know that there’s enough of your net income available to make the monthly mortgage payments. One way to prove that’s the case is to maintain a lower debt to income ratio.
All this ratio means is that you have relatively little debt in comparison to the amount of money you have coming in each month. For example, perhaps you have a car loan and possibly a small balance on one credit card. Even after allowing for those obligations, you can still afford a mortgage payment that’s more than the amount you currently pay for renting an apartment. That type of scenario is likely to get positive attention from more than one lender.
A Reasonable Credit Score
When was the last time you took a good look at your credit reports? What sort of information has been added in the last year and what’s the score on each of those reports? Ideally, the scores from all the major credit bureaus are higher than the minimum required by the lender. It’s also nice if all the most recent comments indicate that you pay your bills on time.
Before approaching any lender about a mortgage, review those reports carefully. If anything is incorrect, work to have the reports updated. Doing so could increase your score a few points and help you get an offer with slightly better terms and conditions.
Funds for a Deposit or Down Payment
When you sit down to talk with the lender, it never hurts to have money tucked away for a down payment. The fact that you’ve saved the funds and earmarked them for this type of acquisition will set well with the lender. It also means that the amount you need to borrow is lower, something that could help you lock in a shorter-term and own the house outright sooner rather than later.
If anyone has told you that being approved for a mortgage is impossible just because you’re self-employed, don’t listen. There are lenders who will work with you. Make sure you have your finances in order, provide all the documentation needed, and you could be moving into your own home by this time next month.