- October 3, 2017
- Posted by: steve
- Category: mortgage news
Being self-employed has a lot of perks. Not only do you get to set your own schedule, but you can avoid office politics, work in your pajamas, and run your business your way.
Unfortunately, many people who work for themselves assume that they’ll have a harder time getting credit or a mortgage. It turns out that you can actually get a lower mortgage rate if you’re self-employed. Read on to learn more.
Self-Employed? Here’s How You Can Get a Lower Mortgage Rate
More than 10% of American workers are self-employed. But many of them find it difficult to get a mortgage.
This is because banks are in the business of reducing risk as much as possible. They need to be 100% sure that you’ll be able to pay your mortgage each month.
The application process for a freelancer or business owner involves determining eligibility. Here’s how:
After the financial crisis, the Consumer Financial Protection Bureau created an ability-to-repay rule. This ensures that borrowers are able to afford their loans.
To calculate this, lenders will look at both your debts and your income. When you work for yourself this will usually be based on your tax returns over the past two years. They’ll also look at your reserves, like cash savings or assets.
This is used to determine your likelihood of fulfilling your mortgage payments. Your credit history will be used to determine your loan terms and mortgage rates.
The higher your credit score, the better. For most mortgages, you’ll need a score of at least 620, with some requiring at least 640. It’s a good idea to begin checking your credit score well before you apply for your mortgage, to make sure it’s correct. You can do this for free at Credit Karma.
Lenders will also want to know the market value of the property you’re hoping to buy. This helps them gauge their level of risk. Most of the time, this will mean a home appraisal to ensure the value of the property matches the amount you want to borrow.
How the Self-Employed Mortgage Process is Different
There are a few ways that the mortgage process is different for people who work for themselves. While these can make it more difficult to get a mortgage initially, they can also work out more advantageous in the long run.
Here are some tips:
Think Carefully About Tax Deductions
When tax time arrives, people who work for themselves will usually report their net income. This is their gross income minus any expenses that they needed for their business.
This is a great idea when it comes to Uncle Sam. The lower your net income, the less tax you’ll pay.
Unfortunately, your eligibility for a mortgage is based on your net income. That means that when you make business deductions, it actually counts against you when you want to apply for a mortgage.
For this reason, you’ll need to prepare in advance when you want to apply for a mortgage. It will often be worth claiming fewer deductions in the two years leading up to your application so you don’t create roadblocks for yourself with the appearance of a lower income.
Put Down a Large Down Payment
The larger your down payment, the less you’ll need to borrow. You’ll also have lower monthly payments. That means that you’re more likely to be approved for a mortgage.
This makes you look like less of a risk to potential lenders, so you can get your foot on the first rung of that property ladder.
More Americans are moonlighting, working on their side hustles, and running their own businesses than ever before. And lenders are slowly beginning to recognize this. That means that people who are self-employed have more options than they’ve had in the past.
One of the best things you can do is shop around to see which lender will offer you the best terms and rates. While being self-employed can make things trickier during the application process, you can still negotiate for a better rate. This is particularly true if you have a great down payment and good credit rating.
More and more lenders are realizing that they need to attract a new generation of business owners and freelancers. And some are now offering new forms of loans. These include:
Alternative Income Verification Loans
Most lenders will want to look at your tax returns to verify your income. And as you learned earlier, this can be bad news if you’re self-employed.
Now you can choose to use an Alternative Income Verification Loan. These loans are designed specifically for investors and those who are self-employed. They fill the gap for people who may not be able to qualify for a mortgage according to traditional loan guidelines.
Instead of using the traditional documentation to verify your income, you can show 12-24 months of bank statements. This can prove that you can afford to meet your mortgage payments.
Stated Income Loans
This is another option and allows you to get a mortgage by telling the bank how much you earn each year. These are also known as low-documentation loans. Lenders won’t verify your income, but they will often want to see where you’re getting your money from.
Here’s the thing: If you’re self-employed, you may initially need to accept a slightly higher interest rate than you would like. But good credit builds good credit. That means that once you have your mortgage and a history of paying on time, you can then refinance.
This will often leave you in a much better position since you would have gotten your foot in the door and can then point to your solid repayment history.
Ready to Get Your Mortgage?
As you can see, it is possible for you to get a mortgage, even if you work for yourself. And, you don’t need to commit to years of paying super-high interest rates to do it.
If you’re ready to secure your financial future with your first home, get in touch today to learn how we can help.