Getting Approved for a Mortgage When You’re Self-Employed

If you’re like many Americans today, you have chosen to work for yourself.  While this may be a good thing for you, it might not bode so well for your chances of securing a home mortgage.  Even if you have outstanding credit and plenty of assets, you may have a difficult time finding a lender who is willing to take a chance on you.  Being self-employed may mean that you will have to jump through a few more hoops than a typical home buyer; but it is not impossible, with a little work you may be able to secure a mortgage even while being self-employed.

The first thing that you should work on is improving your existing credit rating.  Every borrower needs to have almost perfect credit in order to be approved for a home loan; this is even more true for someone who is self-employed.  In today’s real estate market to be approved for an FHA loan an individual will need to have a credit score of at least 620 – 640.  If you’re trying to secure the best possible mortgage rates for a conventional loan you will be required to have a score of 740 or higher.  Many lenders find self-employment income to be a higher risk than that of someone who has a regular weekly paycheck.  By having a high credit score, you will be showing prospective lenders that your employment has not had any ill-effect on your finances.

The next thing that potential lenders will consider is your debt-to-income ratio.  Lenders are more likely to approve someone who has a low debt-to-income ratio.  Lender’s prefer to see an individual with a ratio of 41% or less.  To estimate your ratio you can use a mortgage calculator to estimate your housing costs and any other outstanding debt you may have.  You may also want to pay off as many outstanding debts as possible to help lessen your ratio percentage.

Many individuals who are self-employed tend to reduce their income for tax reasons by deducting business expenses.  Because lenders base their decision on the amount to lend you partly on your tax returns, this can actually cause you to be approved for less than you were expecting.  The FHA has recently released new rules that require self-employed borrowers to prove their ongoing income in the form of a year-to-date profit and loss statement if more than one quarter has passed since your last tax return was filed.

While being self-employed may make securing a loan more difficult, if you can prove to a lender that you are a good risk, they may be willing to take a chance and approve your application.  But be prepared to experience many hurdles along the way, it is a difficult process and one that you should be prepared for.

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