Posted by Jaymie Tarshis on 9:31 AM with No comments
So you're self-employed. You have the power to make your own decisions without the hassle of ever being micromanaged. However, when it comes to qualifying for a mortgage, there can be some disadvantages to making your own income.
Even with good credit and a sufficient amount of assets, you will still encounter mortgage lenders that need proof of your tax returns. Sometimes, they may even require a quarterly profit-and-loss statement in order to establish sufficient income funds for the loan. Therefore, you want to make sure you taking the right steps before you try to qualify for a home loan.
1. Make sure your credit is worthy
Whether you're self-employed or W2-ed, you have to be credit worthy to qualify for a mortgage. You'll want at least a 620 or 640 for an FHA or VA loans and well over a 700 for a conventional loan.
Some lenders consider self-employed borrowers as higher risk and may require you to have a slightly higher credit score than usual. I would recommend checking your credit report at least 6 months to 1 year before you wish to buy a home in order to ensure enough time to raise your score if needed.
For more credit tips read, Mortgage 101: How to build your credit from scratch.
2. Reduce your debt
Most lenders prefer an overall debt-to-income ratio of 41% or less, though it is possible to still qualify up to 45% with other compensating factors. This includes all monthly credit card and loan payments as well as your mortgage.
Check out RANLife's mortgage calculator to estimate your monthly housing payment and see what you feel comfortable paying. The more debt you pay off before you apply for a mortgage, the more house you will be able to qualify for.
3. Prove your income
This is where it can get tricky. Many self-employed individuals reduce their income for tax purposes by deducting business expenses but beware that your income for a mortgage loan will be the income stated on your tax returns. Even if you made more than that before deductions.
Besides this stipulation, most lenders also want an average of two years self-employed income. Meaning that if you don't have two years of self-employed tax returns yet, you might need to wait. Even if you make enough money to qualify for a mortgage, it won't matter to the lender if they can't prove an average income over two years.
FHA and some other programs require self-employed borrowers to prove their ongoing income with a year-to-date profit-and-loss statement.
For more information about self employed income, contact one of our loan officers by applying here.
4. Save money for reserves
Though reserves may not always be required, it's good to be prepared. Some lenders like to be able to see two months of PITI (principal, interest, taxes, and insurance) payments to protect yourself in case of an emergency.
Lenders like to know that a self-employed borrower with fluctuating income is going to be able to handle their monthly bills and finances. Just remember to have at least two months in savings, if not more.
Being self-employed doesn't disqualify you from buying a home. If you are self-employed with a solid two years of income tax returns, good credit, and a relative amount in assets you should be able to qualify for a mortgage.
To find out if you qualify for a mortgage, apply here now. You can also contact a RANLife Loan Officer at 800.461.4152 for more information and questions.