For most American’s, getting a mortgage is an essential step in the home buying process. Potential homebuyers must provide their credit score, reveal their outstanding debt, and verify their income in order to qualify. For the approximately 16 million self-employed Americans, this last step gets a bit complicated.
Lenders are primarily concerned with two things when it comes to verifying your income: Do you make enough each month to make your mortgage payments? And, is your employment status likely to remain stable? For self-employed homebuyers, this can be challenging to prove.
If you’re a self-employed applicant, in addition to demonstrating you have stable or increasing income, there are other ways you can boost your appeal to lenders to secure financing and buy your next home.
Keep Flawless Business Records
For self-employed borrowers, keeping clear business records is essential to secure a mortgage. When lenders can easily understand how your business generates income they are more likely to issue you a loan.
“Keeping good business records makes it much easier for the borrower to submit their loan documents with fewer questions from the processor and underwriter,” Robert E.Tait, a loan originator with Motto Mortgage Elite Services said in a U.S. News and World Report article.
You can maintain flawless business records by:
- Keeping your business and personal finances separate.
- Organize your invoices and track your monthly expenses.
- Create a quarterly updated earnings statement.
Improve Your Credit Score
Lenders use your FICO score to assess your credit risk. In 2020, the average FICO score reached a record high of 710. Typically, lenders are looking for a credit score of 620 but with rising averages and tightening standards, some may be looking for a slightly higher score.
As a self-employed borrower, raising your credit score can help you increase your appeal to lenders. You can improve your credit score by:
- Making on-time bill payments.
- Keeping your credit card balance under 30% of your credit limit.
- Paying down your debt.
Pay Down Your Debt
Your debt-to-income ratio (DTI) is the percentage of your monthly income that goes toward your monthly debts. Borrowers with a low DTI are a less risky choice for lenders.
You should try to get your DTI to 43% or less. To calculate your DTI, you can divide your monthly debt by your monthly income (before taxes). To reduce your monthly debt, and improve your DTI, pay down recurring monthly payments like student loans or car payments.
Sign With a Co-Borrower
You can sidestep a bulk of the documentation requirements as a self-employed borrower if you apply with a co-borrower. A spouse with a W-2 proving they can pay the mortgage and other monthly expenses is a great option for a co-borrower.
Your lender can include both names on the loan. This will make you both responsible for payments but allow the lender to only pay attention to the co-borrowers income.
Make a Big Down Payment
When you put equity into your home with a large down payment you appear less risky to lenders. You can also avoid private mortgage insurance and possibly receive a lower interest rate.
Obviously, making a large down payment requires you to have cash on hand. This isn’t feasible for everyone, but if you’re self-employed it may be worth holding off on a home purchase while you save up for a sizable down payment.
Self-employed borrowers who can prove their income is large enough and stable enough to make their monthly payments should have no trouble securing a loan. If your income is less clear you may want to boost your appeal to lenders in other ways.