One of the most difficult things for self-employed people to do is to secure a mortgage loan. But with the low rates these days, many of them are trying to get mortgages and take advantage of this buyer’s market. It is often difficult for self-employed people to prove their income and show that they are financially stable which makes them unattractive to lenders. But here are five tips you can consider if you are self-employed to make the mortgage process easier for you.
1. Save a large down payment. The larger your down payment is, the more attractive you become to lenders for a mortgage loan. This is because you have more invested in the home so the banks assume that you are less likely to just walk away from it if you get into some financial troubles. Many homebuyers put up at least 10 percent with many of them putting up 20 percent. If you can exceed that figure, you should be in good shape financially.
2. Keep a well-stocked emergency cash fund. On top of having a large down payment, you should also have a good amount of money stored away in an emergency fund. This puts the lender at ease because it shows that you have options in case your business begins to fail. It also shows that you are responsible with your money.
3. Improve your credit score. For any type of loan, your credit score is going to be a part of the decision making process on the part of the lender. If you plan on getting a mortgage six months or a year down the road, start paying your bills on time and paying down your debt right now. By the time you apply for a mortgage loan, you could increase your credit score significantly and get a better rate as well as become a more attractive borrower.
4. Pay off debt. This goes along with increasing your credit score, but you should focus on the debts that you can completely pay off. The fewer monthly bills you have, the better your situation will look to lenders. You may even qualify for a larger loan since you have more money each month that you can apply towards the mortgage payment.
5. Show the paperwork. Self-employed borrowers need to show a lot more paperwork than other types of borrowers because they have to prove that their business is stable enough to make the mortgage payments each month. W-2 forms, balance sheets, profit and loss statements and anything else that shows your track record of income will help make your case. Keep all of these types of documents in order so you can show them to the potential lenders when applying for a mortgage.
It is not entirely impossible to get a mortgage loan if you work for yourself. But with the subprime mortgage debacle and foreclosure rates, banks are protecting their money more than ever. It is up to you to show that you are a good financial risk and that you will make your payments each month.