5 Tips For Securing A Mortgage When You Are Self-Employed
Follow These Expert Tips and Your Dream Home Will Still Be Within Reach
The struggle is real for self-employed homebuyers trying to secure a mortgage — but the good news is it doesn’t have to be. While it’s true self-employed borrowers may have to take a few extra steps to get approval, you can still secure a mortgage at the same or similarly low rate to traditionally employed borrowers.
So, what makes it more difficult for self-employed individuals to get approved?
Proving Steady Income is More Complicated
Mortgage lending is heavily reliant on documentation and numbers. When issuing mortgage loans, banks and other lenders are most interested in ensuring borrowers can afford their mortgage notes long-term. By doing so, the financial institution is protecting itself against default or losing money on the loan.
For borrowers with a traditional job, a steady income can be proven with pay stubs and a W-2, which typically remain the same from check to check and year after year. For self-employed borrowers, proving steady income and the ability to repay their mortgage over time is much more complicated in most cases, since earnings are often irregular and assets are frequently tied up in the business rather than neatly deposited into a personal account.
Sound Business Practices Can Negatively Affect Personal Debt-to-Income Ratio
In addition to the fluctuations in income that are often an inherent aspect of self-employment, lenders also factor in the viability of the business when determining whether or not to issue a loan. Moreover, the financial maneuvers that self-employed business owners often use to their advantage — like tax deductions and business write-offs — can make securing a mortgage more difficult because they affect the debt-to-income (DTI) ratio.
This total of monthly debt payments divided by monthly income is a major factor in lending decisions because it is an indicator of long-term repayment ability. If tax write-offs and deductions make your income appear smaller, it may also reduce the amount you qualify for on your loan.
Self-Employed Borrowers May Not Meet Qualified Mortgage Underwriting Requirements
After the housing bubble burst in 2008, the Consumer Financial Protection Bureau adopted “the QM rule” in 2014, which set strict guidelines around how lenders determine whether borrowers can afford their home loans. This process of evaluating borrower eligibility is known as underwriting, and it is an essential element of home loan approval.
The QM rule, which stands for qualified mortgage rule, is meant to protect borrowers and lenders alike, but the restrictions can make it more difficult for self-employed borrowers to get approved for a qualified mortgage (QM) because the guidelines for them are so stringent. Income, employment status, DTI, and credit history are all factors regulated under the QM rule.
But qualified mortgages are not the only way to get approved. Some lenders, like AmCap Home Loans, also offer non-qualified mortgage programs whose underwriting requirements are less rigid than those of their QM counterparts.
How to Get Approved As A Self-Employed Borrower
Yes, it looks like a lot of red tape standing between self-employed borrowers and their dream homes. But if you are one of the 16 million self-employed workers in the United States, don’t count yourself out of the homebuying game just yet.
Armed with the option of non-QM loans and a few other financial tips, self-employed borrowers can confidently begin their new home search knowing a mortgage loan is within reach. Here are the expert’s best tips for securing a home loan as a self-employed applicant.
1). Keep Business and Personal Finances Separate
All loan applicants are required to provide extensive financial documentation to prove income, debt, and ultimately whether they will have the ability to repay the loan. For self-employed borrowers, they must provide this documentation for both their personal and business finances.
Maintain separate checking and savings accounts as well as separate credit card accounts for personal and business dealings. Not only does this make it easier for lenders to determine the financial health of each, but it also adds credibility to your business and instills confidence in the accuracy of your records. Detailed records of business income, expenses, and regular profit-loss analyses can also improve confidence in your business viability and thereby your ability to repay your home loan.
2). Time Your Application With Your Business Success
Most lenders like to see at least two years of financial success from their self-employed borrowers prior to issuing a loan. It’s best not to apply for a mortgage when you are just starting your self-employment endeavor and your business outlook is uncertain. Instead, wait until you have at least two years of good and steady or increasing earnings before applying.
Doing so with increase the likelihood you get approved and could either increase the amount for which you are approved or qualify you for a lower interest rate or both.
3). Improve Your Debt-to-Income Ratio
Your DTI is one of the primary factors in mortgage lending, regardless of the borrower’s employment status. For many business owners, their DTI is higher than traditionally employed borrowers because they often have business loans that increase debt while business practices can make income appear smaller, as previously explained.
Still, it’s important for self-employed borrowers to put themselves into the “low risk” DTI range, typically around 43 percent or lower, in order to qualify for a home loan. Paying down both personal and business debt and avoiding opening up new lines of credit in the months prior to applying for a mortgage will go a long way in ensuring you qualify.
4). Avoid Putting All Your Savings Toward Your Down Payment
While it may be tempting to throw all of your savings into a down payment to decrease monthly mortgage payments, self-employed borrowers would be wise to set aside a sizeable amount of money to keep in savings. Because business viability is a factor in loan approval for the self-employed, having a significant nest egg stored away gives lenders confidence that you will be able to maintain monthly mortgage payments by dipping into savings should your business earnings take a dive.
5). Enlist the Help of an Experienced Mortgage Professional
While bank employees are tasked with keeping up with policy and regulatory changes for a variety of loan types, mortgage lenders deal exclusively in mortgage loans. An experienced mortgage professional will have access to a variety of loan types and have the in-depth knowledge to customize a mortgage product that fits your individual needs.
As such, mortgage lenders are an ideal choice for self-employed borrowers. The experience they provide is much more personal and the lending options are more flexible than what you would typically receive from a bank. This becomes especially useful for borrowers who may not qualify for a loan under the QM rule or who may be deemed high risk based on other factors.
If you are a self-employed borrower ready to make your move into a new home, give the hard-working team at AmCap Home Loans a call and make 2020 your best year yet.