If you‚Äôre 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‚Äôs real estate market to be approved for an FHA loan an individual will need to have a credit score of at least 620 ‚Äì 640.¬† If you‚Äôre 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‚Äôs 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.