Purchasing a home may seem like one of the biggest milestones for anyone. If you are someone who is self-employed, going through the mortgage process may seem a bit more challenging compared to those who may be working a regular 9-to-5 job. One major obstacle is income verification, which is easily done for those who can produce pay stubs or W-2s. For self-employed individuals, they won’t have them for such purposes.
However, not all is lost for self-employed borrowers who want to buy a home. You will need to know the requirements of being approved for a mortgage and know what to do to meet them accordingly. If buying a home is one of your priority goals, being self-employed and lacking the necessary documents for income verification shouldn’t stand in the way.
Why Is It Difficult For Self-Employed Individuals To Get A Mortgage?
It’s great being your own boss. You get plenty of perks such as working your own schedule, deciding who your clients are, and so on. But the big issue here is that it may make the mortgage process a lot more difficult. The reason for this is that lenders often look for steady, reliable income that indicates regular, on-time payments. Contrast that with self-employed individuals or freelancers who deal with fluctuations in their earnings compared to those who work on a salary.
The challenges for self-employed borrowers may seem like major difficulties. They tend to include the following:
- Providing consistent income over time
- Scrutiny of business expenses may reduce your ability to qualify for a mortgage as a self-employed individual.
- Limited credit history
- Spotty or erratic cash flow
- Rigid documentation requirements
One thing to remember is that these challenges can be overcome. Even better, working with a knowledgeable self-employed mortgage advisor for Chester area freelancers and independent contractors may be your best bet in moving forward with purchasing a new home. They can also assist you in finding the best mortgage broker for self-employed individuals like yourself.
What Do Lenders Look For In Self-Employed Applicants
In order to determine your eligibility for self-employed mortgages for Chester homebuyers, it’s important to know what lenders are looking for in applicants. There are some key areas to consider before submitting an application. These include some of the following self-employed borrower requirements:
- Income stability: Lenders typically require applicants to provide two years of personal and business tax returns to evaluate their average income. What they are looking for is determination that your income is reliable, as well as an understanding of your true earning potential.
- Credit Score: If you have a credit score of approximately 680, this can increase your chances of having your application approved. However, it is not a guarantee that it will happen. Your credit score is a key factor in the application process. If you have a lower score, some programs may still accept you, depending on specific aspects.
- Debt-to-Income Ratio (DTI): Your DTI represents the percentage of your monthly income that is allocated to debt payments. Ideally, you should have a DTI of 43 percent. If you are self-employed, it would help if the percentage were even lower. Like a high credit score, a low DTI can increase your chances of approval (but again, there are no guarantees). A mortgage broker working with self-employed individuals may assist you in determining your DTI before moving forward with the process.
- Business health: Your profit and loss statements, balance sheets, and bank statements are all taken into account here. The purpose is to determine if there is stability in your business.
Simply put, self-employed borrower requirements are vastly different from those who procure W-2s and pay stubs to shoe stable income. Nevertheless, you’ll have a good idea to prepare for the road ahead while also working with a self employed mortgage advisor that can assist you with any additional tasks you need to fulfill during the application process regarding a residential mortgage for freelancers.
Top Mortgage Tips For Self-Employed Individuals
These self-employed mortgage tips can help you along your journey into finding a home that fits you best (and a mortgage that is fair for you). Whether you are a small business owner, a freelancer, or an independent contractor, these tips apply to you. Here’s what you need to know from before seeking other self employed mortgage advice:
- Keep personal and business finances separate: Make sure that you have separate bank accounts for both your personal and business finances. Lenders will be able to easily distinguish the income and expenses from both accounts.
- Improve your credit: This is as easy as paying down any debt you have while avoiding late payments. Make sure you review your credit report for any errors before applying for a mortgage.
- Strategically minimize deductions: Tax write-offs can be great for keeping the bill low. However, it can reduce your taxable income that is vital to your mortgage application. If you need assistance, be sure to work with a tax professional to ensure you balance it all out.
- Save for a larger down payment: A bigger down payment may do you favors since it lowers your risk. In the eyes of the lender, it can show that you are financially responsible.
If you are considering a home loan for self-employed individuals in PA, knowing these tips can help you in the long run. While it’s no easy task to secure a mortgage, you may have options to consider such as working with a self employed mortgage broker that can find you the best deal. Also, there may be other alternatives that you can consider including the following:
- Bank statement loans that use bank deposits instead of tax returns
- Non-QM Loans that provide flexibility for credit history and documentation
- FHA and VA loans for those who have limited savings or lower credit
Indeed, you do have options at your disposal if the traditional mortgages seem like a difficult task. If you plan on purchasing a home, just know that you may end up with something else in terms of a loan that may be the best fit for you in the long run despite certain challenges like a lower credit score.
Let Penn Street Mortgage Assist Self-Employed Individuals Like You
At Penn Street Mortgage, we believe that being self-employed shouldn’t make it difficult for you to get the home of your dreams. Since we know about mortgages and the house buying process, we’ll be happy to assist you from start to finish when it comes to securing the right mortgage. Don’t tackle this process all on your own. For more information on how Penn Street Mortgage can help, contact us today.