The NWM Blog
Written by Northwest Mortgage
Published on Fri, Jul 10, 2020, Last Updated on Fri, Jul 10, 2020
Being self-employed and looking for a house at the same time, isn’t easy. It can be a real hurdle, but it’s one you can cross with the right guidance. The two obstacles in your way include:
- Lenders are concerned about your inability to make monthly payments because you won’t be making a steady income.
- Lenders may refuse your request for a mortgage outright because they don’t want to deal with the extra paperwork involved in giving you a mortgage.
Does this mean you’ll never qualify for a mortgage? Of course not! Just because these are obstacles, that doesn’t mean they can’t be avoided or jumped over. We’ll tell you the issues you’ll face when shopping for a mortgage and how you can turn the tables in your favor.
What Issues Will You Face When Shopping for a Mortgage?
Since you’re self-employed, you’ll face several issues when you explore your options for a mortgage. To compensate for being self-employed, you may have to pay a higher interest rate than others. Since there’s a chance lenders will turn you down, your options can become limited. Limited options can mean less chance to negotiate a lower interest rate.
You may have already struggled to find a lender who is willing to consider you for a loan. If you use your business expenses to decrease your taxable income on your tax returns, it puts lenders in a tricky situation where they question whether you make enough money to buy a home. You’ll also have to make a significantly larger down payment because lenders may want you to have a lower loan-to-value (LTV) ratio.
You can resolve these issues by transforming yourself into a candidate that lenders will be more willing to work with. This then makes you stand out in a positive way, rather than negatively.
How to Turn into a Candidate a Lender Will Like.
Here’s how to turn yourself into a candidate a lender will prefer dealing with:
Increase Your Credit Score
The higher your credit score, the higher your chance to secure a loan to buy a home. You’ll get a lower interest rate in return, hence making it worth all the effort you put into increasing it.
Put Down a Large Down Payment
Putting down a large down payment on your home increases your home’s equity. For a lender, that’s a good sign, as they know you’re less likely to walk away from the home even if you land yourself in a financial crunch. This lowers the risk level and improves your odds of being approved.
Have a Large Sum of Money in Your Emergency Fund
If you intend to buy a home, ensure there’s a lot of money saved up in your emergency fund, as the lender will want to see it. Having significant cash reserves shows the lender that in the event your business fails, you’ll still be able to make monthly payments.
You need to repay all your consumer debts. By paying it all off before the mortgage process starts, you’ll be eligible for a higher loan amount due to increased cash flow. This also makes you look good to a lender because they see you can pay off your debt, which means you are more likely to be able to pay off your loan.
Show a Self-employment Record
An established self-employment record shows lenders that you know what you’re doing, and you’ll be more likely to qualify for a loan. Some experts recommend having at least two years of a successful and established self-employment record. In contrast, other experts advise getting a loan when interest rates are low despite not having a successful self-employment record.
You need to show them your income through the years through your tax returns, balance sheets, and profit and loss statements. It’ll increase your chances of being eligible for a loan.
Northwest Mortgage works with many self-employed clients. You can trust us to help you find a home. Contact us if you have any questions.