Are you self-employed and ready to own your own home? Congratulations on taking this significant step towards financial freedom! However, getting a mortgage isn’t as easy for self-employed people as it is for individuals with a fixed salary.
But don’t worry; we’ve put together six tips to help you attain a mortgage when you’re self-employed.
Understand What Self-Employment Means
What is self-employment, and how does it work? This is crucial to know when applying for a mortgage. According to the IRS, self-employment means that you work for yourself or have a business where you’re responsible for all finances, taxes, and deductions.
To prove that you’re self-employed, you’ll need to provide documentation such as bank statements, income tax returns, and profit and loss statements.
Have a Steady Income Stream
One of the most significant hurdles for self-employed individuals when applying for a mortgage is showing that they have a steady income stream. Lenders like to see a steady income for at least two years before considering your application.
If your income fluctuates, it’s a good idea to consider taking on longer-term contracts or diversifying your income stream. Generally, the more stable your income, the better your chances of getting approved for a mortgage.
Create a Good Credit History
Your credit score is an essential factor when it comes to applying for a mortgage. It’s essential to keep an eye on your credit score and make sure you’re paying all your bills on time. Excessive debt can also negatively affect your credit score.
The best approach is to avoid accumulating too much debt and ensure that you’re using your available credit wisely.
Research Different Loan Options
There are multiple types of mortgages out there, and it’s essential to understand the different options to find the best one for you with the help of a mortgage broker. Typical loan options include fixed-rate mortgages, adjustable-rate mortgages, VA loans, and FHA loans.
Each of these has different requirements and qualifications. Do your research and compare the rates and features of each type of loan to find the one that suits your needs best.
Check Out Bank Statement Mortgages
If traditional mortgage options don’t work for you as a self-employed individual, consider checking out bank statement mortgage. Bank statement mortgages are specifically designed for self-employed borrowers with inconsistent income streams.
Typically, these mortgages base the borrower’s qualification on their bank statements instead of tax returns. Keep in mind that these mortgages typically have higher interest rates and may require a more substantial down payment.
Get Pre-Approved before Shopping for a Home
Getting pre-approved for a mortgage means that you’ll have an idea of how much you can borrow, which will make the home buying process smoother. It’s also a practical way of proving to the seller that you’re serious about buying their home.
To get pre-approved, you’ll have to provide your lender with documentation such as tax returns, bank statements, and credit reports. After reviewing your application, the lender will tell you how much you can borrow, and you can start searching for a home within your budget.