The bad news is that because of your self-employed status, there are additional hurdles and complications associated with your loan application. But there are steps you can take to improve your application and maximize your chances of qualifying (without increasing your interest rate or monthly payment).
Prove Your Income Stability
Lenders will typically average your last 2-3 years of income to determine how much you regularly earn. But for self-employed borrowers, there is an added layer of scrutiny—lenders will want assurance that your business is profitable and proof that it will continue to be profitable in the future.
This means you will need to provide them with information about:
· The nature of your business
· Your business’s financial history
· Company tax returns and 1040 forms from the last 2 years
· Bank statements and balance sheets
· List of assets (other investments, savings accounts, etc.)
· Anything else that highlights your ability to meet monthly mortgage payments
Proof of income stability is a vital element of the loan application process because it factors into your debt-to-income ratio (DTI). Pro tip: if you’re DTI is high (above 36%), consider adding a co-borrower or co-signer to your application.
Disclose Your Work History
For regular employees, work history is very straightforward. For those of us who are self-employed, work history is a bit more complicated. Lenders essentially want evidence of a successful track record—proof that you know how to run your business.
Be prepared to provide extensive company documentation like:
· Verification that the business exists (business license, a signed letter from your CPA, any trademarks, patents, etc.)
· Signed contractor or consulting agreements
· Letters from clients
· A statement from your accountant
Note: if your business is less than 2 years old, you will also want to provide proof of work experience in a related field.
Improve Your Credit
Credit scores are fundamental to mortgage loan applications. The better the score, the more likely you are to qualify for the rate and term of your choice. For self-employed borrowers, a good credit score also helps diminish lender risk. So even if your business is fairly new or you’re not quite earning as much as you’d like, your credit score could help tip the scales and push your mortgage application through.
A few tips for improving your credit score:
· Consolidate your debt into single lump sum payments
· Review your credit history from multiple bureaus and make sure everything is accurate and up to date.
· Correct any mistakes on your credit report before applying for a loan
· Pay off any major debt (credit card, car, etc.) before applying for a loan
Reduce Lender Risk
When all else fails, look for ways to reduce lender risk. This includes:
· Offering a larger down payment (20% or more)
· Creating an emergency fund of cash reserves so that even if the business stumbles, you can still make your monthly payments
· Reduce the number of tax deductions you claim to better prove that your business is profitable and sustainable.
· Stick to conventional conforming loans
· Stick to smaller loan amounts instead of jumbo loans
If you’re self-employed, you’re likely no stranger to extra work. Don’t let the additional documentation requirements stop you from taking out a mortgage. Arm yourself with meticulous business records, shop around for loan options that work best for you, and apply with confidence.