Thursday, October 10, 2013
4 Ways to get pre-approved for a mortgage if you are self-employed
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.
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