For self-employed creators, contractors, and business owners, getting a mortgage loan can be challenging. But it’s entirely possible. Even in a tough economy. It just takes persistence and patience — and being ready to answer a lot of questions from your mortgage specialist.
And finding a mortgage specialist is all about forging a relationship.
Best Tool for the Job: Mortgage Expertise
If you’re like many first-time buyers today, you’re surfing the net, looking at mortgage calculators. And that’s a great way to orient yourself to the options you may have.
Yet the key to securing an approval, arguably, is a mortgage specialist who is ready and willing to work with you.
Using a mortgage company means a professional will have access to a variety of possible loans — generally a broader range of mortgages than a bank. And you’ll get your specialist’s personal attention and guidance.
Where will you find a good mortgage company with a knowledgeable expert? Usually, through word of mouth. For many home buyers, the best expertise is local expertise. Ask other self-employed people in your area — perhaps other entrepreneurs, particularly those who have bought homes in the recent past — for their recommendations. Their real estate agents may also have leads.
A good mortgage consultant prioritizes your success over immediate benefits to the company. A good mortgage consultant becomes your advocate.
This is the person who will:
- Tell you the truth about your buying power.
- Offer you advice about writing off certain income (or not) in your tax returns.
- Become familiar with your financial weaknesses and strengths.
- Compare rates and terms, and help you choose your best loan.
- Help you present your financial picture to a lender.
- Make the case for your eligibility.
- Help get reductions in the lender’s fees if possible.
- Offer you credit advice that could potentially change the loan you get.
As a self-employed person, you have financial details that won’t fit a lender’s traditional checklist. A consultant who takes the time to understand your situation and your goals can be a lifesaver.
Professional Guidance: It’s Good to Have
A great mortgage consultant will work hard to demonstrate to an underwriter that you are financially stable, and can be expected to pay back your loan. At the same time, your mortgage consultant knows tips you can use to improve your standing as an applicant—and enhance it, even after the process is under way. Helping you optimize your credit profile is a great example of this.
Your specialist will typically advise you to keep your current accounts up and running, to maximize your account longevity factors and your credit utilization rate. A mortgage expert can also say whether or not to open a new line of credit. Being approved for a high-impact, international credit card might be worth the effect of a hard inquiry on your report.
Of course, the higher your FICO® Score, the better the terms and rates will be on your loan. Your mortgage consultant will tell you your score. (It could be averaged from different models than the consumer score you’ve looked up yourself.)
Then, if you have a borderline score, your mortgage consultant could request rapid rescoring if you have good recent credit activity. Small score rises can improve your loan, as shown by the FICO Loan Savings Calculator. The rescoring fee might be a worthwhile price for a better interest rate. Your mortgage specialist can let you know. Meanwhile, keep making those on-time credit card payments; don’t let the home search distract you. Autopay is your friend!
Getting Down to Business: Proving Your Financial Staying Power
No matter how good they are, mortgage consultants have to start with strong, financially stable applicants. Given our current, pandemic-related economics, lenders will vet self-employed borrowers very carefully. With mortgage interest rates shooting up, lenders will be all the more cautious about how much debt they’ll place on their borrowers’ shoulders.
To show your ability to repay in the future, the mortgage specialist starts by reviewing the past. So you’ll need to show proof of steady, continual income, going back two years. (Fannie Mae’s loans can be issued to people with a one year of self-employment related to a prior career.)
The lender will be judging your ability to repay your mortgage for at least three years ahead. Unless your work is likely to continue, the lender can’t issue a loan. Federal legislation bars high-risk lending.
Lenders do have some degree of professional discretion. But they must reasonably believe applicants have the ability to repay the loans. The lender decides based on materials you give your mortgage specialist. The mortgage company will scrutinize your documentation before turning your documents over to the lender’s underwriting team.
You’ll need to submit:
- The past two years of tax returns. As a self-employed buyer, if you’re looking at conventional mortgages, you can ask for automated underwriting to scour your tax returns for income that could qualify you.
- Proof of your state business registration (if you own an LLC or other registered business).
- Information that shows your monthly payments and gross income. Your debt-to-income ratio is critical, and should not exceed 43%.
- Statements showing the inflows and outflows of your accounts. Are there large recent deposits? Give your mortgage specialist documentation of the sources. Lenders have to see a consistent income stream, not sudden cash infusions.
- Proof of reliable income sources through and beyond the Covid-19 pandemic, and up-to-date professional licensing.
- A signed profit-and-loss statement for this year so far. In light of pandemic-related business interruptions, you’ll want to show that your recent tax returns are likely to reflect your continuing income situation. Speak with your mortgage specialist about the requirements.
Pro tip: If the recent year or two has been volatile for your business, retrieve several years of tax returns to show that volatility is normal and you can weather it. Are your sources of income changing? Ask your mortgage specialist if you (or your accountant) should draft an explanation of how your past work ties into what you are now doing, and what you will do for income in the coming years.
Success: Going From Strength to Strength
We hope you enjoyed these strategic tips to fortify your position a self-employed loan applicant. No matter how you go about it, know this. Self-employed people can get home loans. Plus, self-employed homeowners have the opportunity to operate a business out of the home, and to deduct part of the home and its expenses on annual tax returns.
The icing on the cake? The equity a homeowner creates in the home over time.
It might take more effort to win a loan approval. But having real estate work for you as a new source of wealth could be well worth that effort. To meet your goals, “who you know” in the mortgage business can make all the difference.
Supporting References
Deeds.com: Strengthen Your Position to Finance Your Home: Here’s Your Five-Point Credit Repair Plan (Jan. 27, 2021).
Deeds.com: Applying for a Mortgage? Get the Facts on Credit Scores – And How to Improve Yours (Nov. 20, 2020).
ConsumerFinance.gov: Final Rules – Ability to Repay and Qualified Mortgage Standards Under the Truth in Lending Act Regulation Z.
ConsumerFinance.gov: What Is a Debt-to-Income Ratio?
Photo credits: Liza Summer and Andrea Piacquadio, via Pexels.