In today’s world, a vital backbone of our economic growth comes from those who are self-employed. While self-employment definitely has its benefits, it can be a little tricky when it comes time to apply for a mortgage. However, not to fear, there are several steps you can take to prepare yourself for a mortgage application if you are self-employed. Let’s explore some things to consider when purchasing a home as a self-employed professional.
Write Off Fewer Expenses
While writing off business expenses is a major perk of owning and operating your own business. It can actually do you a little bit of harm when it comes time to apply for a mortgage. We suggest that you try to write off fewer expenses in the two years leading up to your application. This will, in turn, give you a higher income, which means a higher income tax bracket, however the increase in documented income can also help you get approval for a larger sum of money.
Use An Accountant
When you’re setting up your finances, you want to make sure that everything is in order and is properly documented. As many lenders want to see self-employed income submitted through a professional to ensure proper numbers, we suggest you hire a qualified accountant to handle your financial paperwork. Not only is it more appealing to a lender, it can also help you get a better idea of your financial standing and to know your implications and expenses. Be sure to talk with your accountant about your financial goals in order to have your records set-up accordingly prior to applying, for the smoothest ride through your mortgage process.
Watch your Timing
Timing is everything, even with mortgages. Since you’re self-employed, your record of employment is handled a little differently when it comes time to apply for a mortgage loan. In order to show steady employment and income, try to avoid any extended holidays or sabbaticals within two years previous to purchasing a home. These big breaks, even when explained, can be red flags for business troubles and can make a lender leery of trusting whether or not you’ll be able to make payments.
Ask About Stated Income
A small loophole to being self-employed is applying for a mortgage with a stated income. Essentially, a stated income is an option in which the lender uses a benchmark industry standard of earnings for your field of work, typically in the two years prior to you becoming self-employed. The lender may look into the mean income of someone of that same profession as a comparison for proof of income. As stated income is a complicated approach and lenders use it on a case-by-case basis, you should inquire with your lender about whether or not it is a feasible option for you.
Be Prepared For Higher Rates
Since you’re self-employed, your income may not always be as steady or as exact as an employee of bigger businesses. While hiccups can occur, these can cause some issues with your mortgage application. Despite a solid income from your business, you may still be required to pay a higher interest rate than someone who is not self-employed. Typically, this is because self-employed borrowers are seen as a higher risk, and therefore, the higher interest rate is applied. While this shouldn’t deter you from owning a home, it is something to be discussed with your mortgage broker and to be prepared for.
Offer A Larger Down Payment
As we mentioned, a higher interest rate may be involved in a self-employed mortgage loan. However, you can always counteract those “lender red flags” by offering a larger down payment. While lenders are usually held to the rules of the insurer when less than 20% of a purchase is put forth as a down payment, offering more than 20% can give you some flexibility. Although dependant on your lender and on a case-by-case basis, a higher down payment can potentially help you to have more options when it comes to financing a home purchase.
Buying a home is the single largest investment you will likely ever make, and it’s an exciting purchase everyone should enjoy. Whether self-employed or working within a company, there are different ways to obtain a mortgage loan. If you have any questions about applying for a mortgage as a self-employed professional, don’t hesitate to give me a call at 705-315-0516. I am always happy to help you better understand your financial options to get you and your family into your dream home.