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If you are self-employed, either as a freelancer or as the owner of your own business, your income can fluctuate greatly from year to year. That can make it difficult to get approved for a mortgage, although there are some things you can do to improve your chances. Here are three tips for securing a mortgage if you are self-employed.
While your ability to pay back a mortgage is the most important factor in approval, your credit score is a close second, and that goes for every borrower, not just those who are self-employed. If you have a credit score in the high range — something above 750 or 760 — it will help you get approved for a mortgage.
To boost your score, make sure you pay all bills on time, pay down your debt levels and don’t make any new big purchases or apply for new credit soon before you apply for a mortgage
The more money a bank lends you to buy a house, the more risk it is taking in that the money won’t be paid back. If you are self-employed and considered a higher risk to begin with, one way you can alleviate some of that risk is to be able to put down a large amount of money.
Putting down 20 percent is standard for a conventional loan, and you should be willing to contribute at least that much. Putting down at least 20 percent also will save you money in the long run, because you won’t have to pay for mortgage insurance and you will pay less in finance charges over the life of the loan.
One way to put a lender at ease about your ability to pay for a mortgage is to have significant reserves in the form of assets. If you have large amounts of money in regular savings, brokerage and retirement accounts, it offers a reserve for you to tap should your income take a dive. Other forms of property, such as personal and business property that’s paid off and has value, also help.
Part of the mortgage approval process involves lenders not only looking at how much money you are bringing in, but also how much money is going out in the form of bill payments. More specifically, lenders will look at your debt-to-income ratio, which is a measure of how much of your current monthly income is dedicated to paying your current monthly bills.
If that ratio is too high, you run the risk of getting denied on a mortgage application, whether or not you’re self-employed. As such, do your best to pay down as much of your debt as possible. This will allow the lender to feel more comfortable that your income will be more than sufficient to pay your mortgage without most of your income going towards other debts.
When you apply for a mortgage, you will need to prove your assets, income, and debts, and that is usually done by providing the lender with a set of documents. The average salaried borrower will already need to provide a set of documents to the lender to prove their ability to pay a mortgage. But self-employed professionals may need to add a couple more to the pile.
For instance, you will likely need to submit tax forms from at least two or three years back to show the lender that your business is making stable profits and isn’t fluctuating wildly from one year to the next. Having all necessary documents lined up and ready to be submitted can help improve your chances of getting approved for a home loan.
If you’re looking to buy a home and need to apply for a mortgage to fund your purchase, we’re here to help. Sammamish Mortgage has been providing mortgage programs to borrowers all across the Pacific Northwest since 1992, including Washington State, Idaho, Colorado, and Oregon. Get in touch with us today if you have questions about the mortgage application process.
Whether you’re buying a home or ready to refinance, our professionals can help.
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No Obligation and transparency 24/7. Instantly compare live rates and costs from our network of lenders across the country. Real-time accurate rates and closing costs for a variety of loan programs custom to your specific situation.