Working on a self-employed basis has its pros and cons. One problem that self-employed workers face is getting approved for a mortgage.
Common Roadblocks for Self Employed Workers
Debt-to-Income Ratio – Debt-to-Income Ratio is the measurement of your total debt compared to your income. This can be difficult for self-employed workers – especially if they are just starting their business. They often rely on credit cards, racking up debt when income is spotty at the beginning of their entrepreneurship.
Verifying Income – Even if a self-employed worker makes a favorable, steady income, verifying their employment and income can be more challenging than verifying traditional workers who receive W-2 forms every year.
Legislation is currently working on a new bill, The Self-Employed Mortgage Access Act, which will allow mortgage lenders to use additional sources to document income.
Learn More: Self-Employed Mortgage Access Act May Help Michigan Homebuyers with Nontraditional Incomes
Predicting Steady Income – Unlike W2 workers who receive a steady paycheck, free lancers or self employed workers will experience fluctuations in income making it difficult for lenders to predict their financial future.
Tips for Getting a Mortgage When You’re Self Employed
So what can a self employed worker do to increase their chances of being approved for a home loan? Oakland County mortgage lender, Julie Krumholz explains below.
Planning Ahead is Key – If you are self-employed and are considering home ownership in the future, start planning now, even if you don’t plan on buying for a couple of years. This will give you time to save money, keep detailed records and establish steady income, making you a more attractive borrower.
Keep Up with Tax Payments – Keep up with quarterly tax payments. Also bear in mind that IRS installments are considered debt and will affect your debt-to-income ratio.
Monitor Credit Score – Review your credit report for any mistakes and pay down debt to improve your credit score. This will help you lock in a lower interest rate and will make you a more attractive borrower, especially since your income can be difficult to predict.
Set Aside Cash Reserves – Since it is difficult to predict future income, a lender will like to see that you have savings set aside to pay your mortgage, even if your business experiences a slow period.
Save for a Higher Down Payment – The more money you can contribute to the down payment, the smaller the loan amount will be, which can make it easier to qualify. Don’t use all of your savings as you still will need cash reserves for when work is slow. Can’t afford a large down payment? Consider applying for a smaller loan.
Keep Detailed Financial Records – Your financial records should be easy for your lender to understand your business income. Separate your business and personal checking account. Avoid accepting cash under the table as your goal should be to establish a steady income and prove you can commit to a mortgage payment.
About Oakland County Lender, Julie Krumholz
Julie Krumholz is has been helping homebuyers in Oakland County and throughout Michigan for over 30 years. On a personal level, you will find her to be friendly, straightforward, honest and extremely dedicated to helping her clients.
Whether you are self-employed, work a seasonal job or you are a full time employee there are several loan options available to accommodate a variety of applicants. Contact Julie from Superior National Bank to learn more and start your pre-approval process.
Call Julie Krumholz: 586-382-5482
