Being self-employed comes with amazing flexibility and freedom. However, even successful entrepreneurs often find the prospect of applying for credit daunting. Without the traditional documentation, it can seem like you’re forever jumping through hoops to convince someone to take a chance on you. Are there home loans for self-employed borrowers? What does it take to get approved?
Home Loans for Self-Employed Borrowers
Getting approved for a mortgage with self-employment income may be a little tricky, but it’s very doable. Here’s what you need to know.
Be Prepared to Document Differently
The Dodd-Frank Act of 2010 says that lenders can verify your income and assets using “W–2, tax returns, payroll receipts, financial institution records, or other third-party documents that provide reasonably reliable evidence of the consumer’s income or assets.” Ultimately, a lender wants to be convinced that you have the ability to repay the home loan that you’re seeking. With so many ways to make your case available, you have the chance to weigh your options and choose the strategy that works best.
Know What Lenders Like to See
If you’re going to make a persuasive case, it helps to know what a lender is looking for from a self-employed borrower. According to U.S. News & World Reports, a lender wants to see specific qualities:
- Consistent work. Lenders want to know that your employment is stable. Two years of self-employment in the same industry is preferred. In some cases, one year of self-employment is acceptable if it’s preceded by a year of employment with an employer in the same industry.
- Stable or increasing income. Lenders want to know that you’re going to be able to make your loan payments. That’s why they want to see that your business is consistently producing income and likely to continue doing so.
- Good credit. A strong credit score suggests that you understand how to meet your financial obligations and manage your money and credit. Lenders are going to review your credit score and credit history to assess the risk. Borrowers with higher scores are generally offered better terms. If your credit score isn’t the best that it can be, it may be worth taking a little time to improve it before you approach a lender.
- Cash reserves. The mortgage payment is due even when income is low. Lenders like to know that there is cash set aside to cover expenses when necessary.
- Low debt-to-income (DTI) ratio. Because of the way many self-employed people deduct expenses, calculating DTI can be thorny. Most underwriters will adjust. If yours won’t, it may be a sign that you need to find a lender who has more experience working with self-employed borrowers.
- Sizeable down payment. A large down payment may not be a requirement if your credit is good, but it offers reassurance and can tip the scale in your favor.
Consider a Bank Statement Loan
If you’re self-employed, then you have access to all the same home loans that people who are traditionally employed do. However, a bank statement loan might be especially appealing. Sometimes called self-employed mortgages or alternative documentation loans, bank statement loans are a type of home loan that is based on your bank statement.
As The Balance points out, people who are self-employed claim as many tax deductions and write-offs as possible. That’s only sensible when you’re a small business person trying to maximize your income, but it can hurt your efforts to secure the home loan that you want. If you’re self-employed, then your bank statements may provide a more accurate picture of your finances. Therefore, a bank statement loan may offer a better chance of helping you purchase your dream home. While you may need a slightly larger down payment, you won’t need any tax returns, W-2s, or pay stubs. These loans also tend to come with a surprising amount of flexibility. They generally have fairly high loan limits, and they can be used for the purchase of a primary residence, vacation home, or investment property. Not every lender offers them, but PrimeLending is happy to help self-employed borrowers reach their housing goals.
Do you have more questions about home loans for self-employed borrowers? Contact PrimeLending Denver today.