From Self-Employed to Homeowner: Tips for Getting Approved for a Mortgage
Being self-employed comes with many benefits, such as flexibility and the ability to work on your own terms. However, when it comes to securing a mortgage, being self-employed can present some challenges. Unlike traditional employees who receive a steady paycheque and have a verifiable employment history, self-employed individuals have a more complex financial situation. But don't worry, it's still possible to get a mortgage as a self-employed borrower. In this article, we'll explore some practical tips and strategies to help you navigate the mortgage application process and increase your chances of getting approved for a home loan.
Get Your Finances in Order
Before you even start looking for a mortgage, it's important to get your finances in order. This means organizing your income, expenses, and debt. Lenders want to see that you have a stable income and can afford to make your monthly mortgage payments. As a self-employed borrower, you'll need to provide additional documentation to verify your income, such as tax returns and bank statements. So, make sure you have all your financial documents in order before applying for a mortgage.
Maintain Good Credit
Your credit score plays a crucial role in getting approved for a mortgage. Lenders use your credit score to determine your creditworthiness and the interest rate you'll be charged. As a self-employed borrower, it's even more important to maintain good credit because you may not have a traditional employment history to fall back on. Make sure you pay your bills on time, keep your credit utilization low, and avoid applying for too much credit at once. These simple steps can go a long way in boosting your credit score and improving your chances of getting approved for a mortgage.
Save for a Down Payment
Saving for a down payment is important for any homebuyer, but it's especially crucial for self-employed borrowers. Lenders typically require a down payment of at least 20% of the home's purchase price. This shows that you have skin in the game and are less likely to default on your mortgage. As a self-employed borrower, you may also be subject to stricter underwriting standards, so having a larger down payment can help offset some of the risk.
Consider a Bank Statement Mortgage
If you're self-employed and have a non-traditional income stream, such as income from freelance work or rental properties, you may want to consider a bank statement mortgage. This type of mortgage allows you to use your bank statements to verify your income instead of tax returns. This can be especially helpful for self-employed borrowers who may have fluctuating income or may take advantage of tax deductions to lower their taxable income.
Work with a Mortgage Professional
Working with a mortgage professional who has experience working with self-employed borrowers can be a game-changer. A good mortgage broker can help you understand your options, guide you through the application process, and even help you identify potential obstacles and workarounds. Make sure you choose a mortgage broker who understands the unique challenges faced by self-employed borrowers and has a proven track record of success.
Avoid Common Mistakes
As a self-employed borrower, there are a few common mistakes you should avoid when applying for a mortgage. For example, don't mix your personal and business finances, don't make large deposits into your bank account without a clear explanation, and don't open new credit accounts or make large purchases before applying for a mortgage. These actions can raise red flags for lenders and may hurt your chances of getting approved for a mortgage.
Be Prepared to Provide Additional Documentation
As a self-employed borrower, you'll need to provide more documentation than a traditional employee. Be prepared to provide at least two years of tax returns, bank statements, and profit and loss statements. You may also need to provide additional documentation to explain any fluctuations in your income.
To sum up, being self-employed should not hold you back from achieving your dream of owning a home. While lenders may scrutinize your income and employment history more closely than they would for someone with a traditional job, there are still plenty of options available. By demonstrating stability, reliability, and financial responsibility, you can prove to lenders that you are a worthy candidate for a mortgage.