You’ve created your own business, pulled yourself up by your bootstraps, and made a profit. You’ve watched your dream go from a sketch to a fully-fledged reality. There are around 15 million self-employed people in the U.S. currently who are living out their dream of being their own boss. Unfortunately, being self-employed can seriously hamper your efforts to buy a home.
Those who are self-employed have to work significantly harder to get approved for a home loan. Below, we’ve written some tips to ensure that the process goes more smoothly.
Gather Your Documentation
When you apply for a mortgage, you’ll need to be able to gather important income documentation. Down payment details, debt-to-income ratio, and credit scores will all be analyzed. It’s important to straighten out and organize all of your financial statements far in advance.
It’s especially important to get rid of as much debt as possible before you embark on the home loan process. Things like your student loan, your auto loan, or your credit card debt can be drawbacks in a lender’s eyes.
Know that your mortgage might be more expense
Many lenders considered self-employed workers to be higher-risk employees. Even if you’ve been making consistent income for years, that might not be enough for some lenders. Because you represent extra risk, your interest rate might be higher, and your loan amount might be lower.
However, if you decide to go for it anyway, you can always refinance for a lower interest later rate down the road.
Improve Your Approval Chances
If you really want to get a mortgage, you’re going to have to do some legwork. Here are a few of the steps you can take to make yourself look like a more serious, responsible homebuyer.
- License and register your business.
- Give yourself a W2.
- Lower as much debt as possible.
- Reduce your tax deductions.
- Separate your person and business accounts.
- Keep good records of all transactions, expenses, and income.
- Make a larger down payment if possible.
- Work with a smaller sized bank or financial institute like a credit union.
If you take these steps, you’ll have a much higher likelihood of being approved for a home loan.
What are My Other Options?
If you’re self-employed, you may want to look into bank statement loans. Bank statement loans are designed for those who are self-employed. They act as an alternative for loan borrowers who can’t verify their income traditionally through a W2, two years of tax returns, and pay stubs.
As the name implies, bank statement loans allow borrowers to verify their income with bank statements. This could work for people who are gig economy workers, independent contractors, contract workers, consultants, freelance employees, business owners, and retirees.
To apply for this type of loan, you can provide as few as 12 months of bank statements that show bank deposits. These bank deposits are considered income and allows the banks to determine how much you can borrow.
Advantages of Using a Bank Statement Loan
- The lender doesn’t need to review your tax returns or tax transcripts.
- Regular monthly income deposits act as your income statement
- The lender can review 12 or 24-month bank statements.
- You can get a bank statement home loan for as little as 10% down.
- You can do a cash-out refinance loan of up to 85% of the value of your home.
- You can borrow up to $5 million to buy a property.
- You can choose either a fixed-rate or adjustable mortgage.
- You might be able to qualify for an interest-only mortgage.
Conclusion: Getting a Home Loan as a Self-Employed Worker
When you’re self-employed, expect that you’ll need to do some work to show that you’re ready for the responsibility of a mortgage. Even if you’ve been running your own business for years, the burden of proof relies on you to show that you can afford a home loan. With that said, there are a few steps you can take to give yourself a higher chance of being approved. If you don’t want a traditional mortgage, you can also look into getting a bank statement loan. Use this blog post as a guide and you’ll be getting the keys to your dream home sooner than you think.