Are you self-employed and considering buying a home? If so, you may be wondering how that will impact your ability to secure a mortgage loan. Between the fluctuating income and the difficulty of qualifying for a mortgage, it can be hard to know where to start. Don’t worry — you’re definitely not alone. According to a recent study, nearly 14 million mortgage borrowers in the U.S. are self-employed. And while getting a mortgage when you’re self-employed can be a bit more complicated than when you have regular employment, it’s definitely doable. Here’s what you need to know about buying a house when self employed.
Top Tips for Securing a Self-Employed Mortgage Loan
There’s no question that buying a home is a process, and for self-employed borrowers, it can seem even more complicated. But securing a mortgage when you’re self-employed doesn’t have to be daunting. There are lenders who specialize in these loans and there are certain steps you can take to make the process as smooth as possible. Here are the steps you need to take to secure a self-employed mortgage loan
- Have a good credit score. Your credit score is one of the most important factors lenders look at when approving mortgage loans – so check your credit score and make sure you keep your credit rating in good shape. If it’s not, work on fixing any mistakes or blemishes before applying for a mortgage.
- Improve your debt-to-income ratio. A good debt-to-income ratio is essential if you’re buying a house when self employed and want to qualify for a mortgage. One option to improve your debt-to-income ratio is to increase your income by bringing on additional clients or taking on freelance work. Another option is to reduce your debt by paying off your credit cards and other high-interest loans.
- Shop around for the right lender. Just because you’re self-employed doesn’t mean you have to go through a specialty lender. There are plenty of traditional banks that offer mortgages to small business owners too. Do your research and compare interest rates and terms before choosing a lender.
- Get pre-approved for a mortgage from a specialty lender. These mortgage lenders understand the unique challenges that self-employed borrowers face when trying to get approved for a loan.
- Save up for a larger down payment. Since self-employed borrowers tend to have lower incomes, they may be required to put down more money upfront when buying a home.
- Showcase your stability. Make sure your finances are in order. One of the main things mortgage lenders look for when considering self-employed mortgage loans is proof that you’re a stable, reliable borrower. Make sure to showcase your history of on-time payments and responsible borrowing behavior in your loan application.
- Have your documents in order. Be prepared to document all of your income and expenses so that the lender can properly assess your eligibility for a mortgage loan. This includes bank statements, tax returns, income statements, and any other documentation related to your business income.
- Increase your savings. Increasing your savings could make all the difference in getting approved for a mortgage. By setting aside money each month, you can build up a nest egg that will show lenders that you’re financially responsible. Additionally, having money in savings will give you a cushion in case of any unexpected expenses.
What Are the Self-Employed Mortgage Loan Options
There are a number of self-employment mortgage lenders that specialize in working with the self-employed, and they have a range of products that can fit your needs. Here’s a look at some of the best options available to you.
Federal Housing Administration (FHA) loans are specifically designed to help self-employed individuals qualify for a mortgage, and they offer a number of key benefits. FHA loans only require a 3.5% down payment, which is extremely low compared to other loan types. Additionally, FHA loans are available with fixed-rate or adjustable-rate terms, so you can choose the option that best suits your needs. And finally, FHA loans are backed by the federal government, so you can be confident that you’re getting a reliable loan product.
Types of FHA Loans
On top of the traditional mortgages, there are other types of FHA loan self-employed can avail themselves of.
Home Equity Conversion Mortgage (HECM): This type of mortgage allows borrowers ages 62 and above to exchange their home equity for cash, which can be used to supplement their income or pay for expenses such as major home repairs or renovations.
FHA 203(k) Improvement Loan: This is an attractive option for borrowers who are looking to purchase a fixer-upper, as it can help them make necessary repairs while still financing the purchase of the property. It can also be used to finance the rehabilitation of a property that has already been purchased.
FHA Energy Efficient Mortgage: With an Energy Efficient Mortgage, buyers can finance the cost of energy-saving improvements, such as insulation, energy-efficient windows and doors, and high-efficiency heating and cooling systems.
Section 245(a) Loan: The program offers two types of loans: the Graduated Payment Mortgage (GPM) and the Growing Equity Mortgage (GEM). The low initial monthly payments make it affordable for young borrowers who are still earning a lower income. The payments gradually increase over time, mirroring the expected rise in income as the borrower’s career progresses.
There are a few FHA self-employed guidelines to keep in mind when applying for a loan as a self-employed borrower:
- Home buyers with good credit scores (580 and above) can get FHA loans for down payments as low as 3.5%. If your score falls in the range of 500-579, an eligible home purchase might be possible if you have enough money saved up or a down payment equivalent to 10%.
- You’ll need to provide tax return documentation for the last two years. This is to prove that you have a consistent income.
- You should strive to have less than 31% of your gross income go towards paying off debts like mortgages and property taxes. This is the front-end ratio, which lenders use as an indicator for whether or not someone will be able to survive comfortably with their monthly payment on time each month.
Bank Statement Loan
This type of loan allows you to use your bank statements in lieu of traditional income documentation. While alternative documentation loans typically come with higher interest rates and stricter requirements, they can still be a viable option for buying a house when self employed. Lenders look at 12 – 24 months of your bank statements when evaluating business income for this type of financing option.
A joint mortgage is often used by married couples or partners who are buying a home together. It can also be used by friends or family members who are buying a property together. The advantage of taking out a joint mortgage is that it can help you qualify for a higher loan amount and get a lower interest rate. The downside is that if one person defaults on the loan, the other person is still legally responsible for the debt. When taking out a joint mortgage, it is important to consider all of these factors and decide if it is the right option for you.
Enlist a co-signer
A co-signer is someone who agrees to sign the loan with you and accepts responsibility for the debt if you default on the loan. Having a co-signer who has good credit and steady employment can give lenders confidence that they will get their money back, even if your business hits a rough patch. Co-signing is a serious financial obligation, so it’s important to choose someone who you trust to make payments on time.
Tips for Improving Your Credit Score Before Applying for a Mortgage
A good credit score is important for getting the best interest rates on a self-employed mortgage loan. Here are a few tips to improve your credit score before applying for a self-employed mortgage loan:
- Check your credit report for errors. Inaccuracies can drag down your score, so it’s important to make sure that everything is accurate. You can get a free copy of your credit report from each of the major credit bureaus every 12 months at AnnualCreditReport.com.
- Pay down your debt. The amount of debt you have relative to your credit limit is one of the biggest factors in your credit score, so paying down your balances can give your score a boost.
- Keep old accounts open. Closing older accounts can actually hurt your score, so it’s best to keep them open and active even if you don’t use them often.
- Pay your bills on time. Missed or late payments can have a negative impact on your score.
- Don’t open new credit accounts. Don’t apply for too much new credit at once unless you absolutely need to. Each new account lowers the average age of your credit history, which can have a negative impact on your score.
Things To Consider When Choosing a Lender
Choosing the right lender is one of the most important aspects of the home-buying process. After all, you want to get the best value for your money. Before you start to negotiate house prices, you need to consider the terms of your loan, the interest rate, and the length of time you’ll be paying off the loan. That’s why it’s important to choose a lender that offers competitive rates and terms. Here are a few things to keep in mind as you shop around for a loan:
Think about what type of loan you need. There are many different kinds of home loans available, and each has its own set of terms and conditions. Do you want a fixed-rate loan or an adjustable-rate loan? A conventional loan or a government-backed loan? Once you know what kind of loan you’re looking for, you can start comparing lenders.
Compare interest rates and fees. This is where it pays to shop around – different lenders will offer different rates and fees, so it’s important to compare offers from several lenders before making a decision. Also, be sure to read the fine print carefully – some lenders charge hidden fees that can add up over time.
Think about the level of customer service you want. Some lenders are more hands-on than others, so if you prefer personal attention and individualized service, make sure to choose a lender that offers that. On the other hand, if you’re more comfortable doing things online or by phone, then look for a lender that offers convenient online tools and 24/7 customer service.
Securing a mortgage when you are self-employed can be more difficult than when you have a regular job with a steady income. However, it is not impossible. There are many different types of mortgages available to self-employed borrowers, and there are steps you can take to improve your credit score before applying for a loan. If you are ready to buy a house but are worried about your eligibility as a self-employed borrower, contact our loan experts at Homes by Ardor today. We will help you find the best mortgage for your unique situation and guide you through the application process every step of the way.
Kris Reid is the CEO of Ardor SEO, a company that helps real estate professionals get more leads and customers to predictably grow their business.
Over the years, Kris acquired extensive knowledge of SEO and its practical applications in various industries, with the main focus on real estate.
In 2021 Ardor launched the Icons of Real Estate Podcast to share proven strategies from the top producing icon agents with the real estate community.
After obtaining the real estate license in 2022, Kris joined eXp Realty and launched Homes by Ardor, the platform that was built to be the fastest way to buy or sell a house. Homes by Ardor also provides leads for its partner companies and realtors.