More than 44 million Americans are considered self-employed, and that figure continues growing. Whether you’re engaged in the gig economy or a dividend-receiving business owner, being self-employed can create financial challenges even when you collect a healthy income from your work. One of the major hurdles is in securing a mortgage.
While most banks and mortgage lenders put up roadblocks to obtaining a mortgage, it is possible to get the approval you need. With some time and a little effort, MBANC can make your journey to home ownership a little easier with these tips.
Why getting a mortgage is challenging for self-employed people
The usual mortgage applicant that banks see will have documents they’re comfortable working with – W-2’s and paystubs especially. Those aren’t documents you’ll have on hand as someone who works for themselves. You’ll have a 1099 or a Schedule C Form 1040 instead. Since those docs aren’t the standard for applicants, you could be waiting quite some time for an approval… if it ever comes.
Another hurdle to overcome is verifiable income. While you’ve done quite well for yourself as a self-employed business owner, the ability to report your income and claim write-offs in legal yet creative ways can make it look like you can’t afford the home. It’s all too common for business owners to have a DTI ratio that looks ridiculously high.
Yet, having these obstacles may not restrict your ability to buy a home. With these four tips, you can improve your odds of an approval.
Have thorough financial documents on hand
For people who have an employer other than themselves, a paystub shows proof of consistent income. Banks can and do follow up with employers to determine if their position is steady, mitigating the risk of the borrower defaulting on the loan.
Since a self-employed person doesn’t have paystubs, income and job security has to be verified another way. To prove your financial status, collect two years’ worth of tax returns and bank statements. A deep dive into your finances can help the lender determine that you do, in fact, have enough steady income to support mortgage payments.
Make your DTI ratio attractive
A major factor in affordability is your debt-to-income ratio. The monthly commitments you must service can inhibit the monthly mortgage payment you qualify for if your DTI ratio is too high. Typically, your DTI ratio needs to be 43% or lower including the mortgage payment, although some lenders may allow up to 50%.
If you’re able to pay down debts to remove them from your DTI ratio or consolidate them into a lower payment, that can certainly help with a mortgage approval.
Lower your credit utilization
If it looks like you’ve maxed out the credit you currently have, it doesn’t look good to a lender. If you have a credit card with a $20,000 limit and you consistently carry a balance of $12,000, your 60% credit utilization can skew your approval, even if you’re using a credit card judiciously.
Keep your credit utilization low. That can be by paying down the outstanding balances or by increasing the credit limit.
Use a specialized lender
A traditional bank may eventually get a mortgage processed for you as a self-employed individual or business owner, but the declined rate is much higher than for the average borrower. In some cases, several banks can unexpectedly refuse to approve your mortgage application, even when everything looks to be in order. A lender who specializes in mortgages for self-employed borrowers is the best idea – that’s where MBANC comes in.
Unlike a bank, MBANC will look past what the paperwork says and assess your application based on more accurate data. By delving into your bank statements, 1099’s, and other financial documents, our mortgage experts can see what you truly qualify for, not just what you can prove on paper. In many situations, MBANC can approve a mortgage that other lenders have denied.
Wondering if you can qualify for a mortgage, or how to get started? Contact one of our mortgage experts today for free, no-obligation mortgage advice.