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6 Go-To Mortgage Tips for Self-Employed & Business Owners in 2022

6 Go-To Mortgage Tips for Self-Employed & Business Owners in 2022

Recently, more and more people are choosing to start their own businesses. This is thanks in part to the booming start-up culture, which has made it easier than ever to get your business off the ground. And with the emergence of the gig economy, it's easier than ever to find work that fits your schedule and your lifestyle.

Self-employed people will continue to be a powerful force in the economy in late 2022, as more and more businesses opt for this model. In fact, self-employment is projected to increase by nearly 5% over the next two years. This growth is due in large part to technological advancements that are making it easier for people to start their own businesses. Additionally, there is increasing demand from consumers for products and services that are provided by self-employed businesses. As a result, self-employed people are likely to experience continued success in the years ahead.

Getting a mortgage when you're self-employed can be a real challenge. Lenders want to know that you have a steady income, and they are not always willing to work with borrowers who are self-employed. If you've tried to get a mortgage in the past, you know how tough it can be to meet the strict requirements. But all hope is not lost. There are lenders who are more willing to work with self-employed borrowers, and there are ways to make your application more attractive to lenders.

Why do Self-Employed People Have a Hard Time Getting Mortgage Approval?

There are a few reasons why self-employed individuals may struggle to get a mortgage approved. For starters, most lenders only approve loans for individuals who work for an established company. This means that many self-employed individuals don't meet these criteria and can't get a conventional mortgage.

Additionally, self-employed individuals may have lower incomes and less credit history than traditional employees. This can make it difficult to qualify for a loan, especially if they're borrowing more than the maximum amount allowed. Because of these reasons, self-employed individuals should consider using a cash loan or a home equity loan.

Who Might Offer You a Self-Employment Mortgage?

In the lending world, it all comes down to risk. Lenders look at a variety of criteria when making a decision about whether to approve a loan application, but the biggest factor is always how risky it is for the lender. So even if two lenders have the same rules, they might still make different decisions about individual applications because their risk tolerances are different.

One reason for this is that lenders' portfolios can vary in terms of the types of loans they offer. For example, one lender might specialize in residential mortgages while another specializes in small business loans. The latter lender is likely to be more tolerant of risk because it has a broader portfolio and isn't as reliant on any one type of loan.

Another reason for variation in risk tolerance is that lenders may have different appetites for taking on losses.

Are you self-employed and looking to buy a home? Don't worry, you're not alone. According to the National Association of Realtors, nearly one-third of all homebuyers in 2016 were self-employed. While it may seem like buying a home is out of reach, there are plenty of lenders who are willing to work with self-employed borrowers.

The following tips will help you get a home loan as a self-employed individual:

1. Make a Bigger Down Payment

When you are buying a house, one of the things you will need to think about is your down payment. Down payments are typically a percentage of the purchase price of the home. Lenders like to see larger down payments since it shows that you are committed to the purchase and that you have more skin in the game. They also believe that borrowers who put down more money are less likely to walk away from a loan.

Some lenders may require as much as 20% of the purchase price as a down payment, while others may be willing to accept 10% or even less. Your best bet is to speak with several different lenders and find out what their requirements are. That way, you can be sure to have enough money saved up when it comes time to buy your dream home.

There are a few ways to get your hands on some extra cash for your down payment. One option is to sell some of your belongings or use money from your savings account. If you have equity in another property, you can also tap into that.

2. Organize Your Paperwork

When you're self-employed, you're responsible for handling all of your own documentation. This includes tracking payments and expenses, filing taxes, and maintaining records. It can be a lot of work, but it's also very rewarding. Here are a few things to keep in mind when it comes to document management:

  • Keep track of your payments and expenses. This is essential for filing your taxes correctly. Make sure to keep receipts and invoices for all of your transactions.
  • File your taxes on time. You don't want to miss the tax deadline, especially if you're self-employed. There are many online resources that can help you file your taxes correctly.
  • Maintain accurate records. This is important for both tax purposes and legal reasons. Make sure to keep track of all business-related communications, including emails and letters.

When you are self-employed, it's important to have all of the necessary documents on hand to prove your income. Here's the list of documents:

  • Income Statements & Balance Sheets (for the past 2 years)
  • Income Tax Returns (for the past 3 years)
  • Business License
  • Personal Bank Statements (for the past 6 months)
  • Business Account Bank Statements (for the past 6 months)

3. Stable Credit Score

Your credit score is a major factor that lenders consider when you're applying for a loan. A low credit score can lead to a higher interest rate and make your life more difficult in the long run. Not maintaining a good credit history can come to haunt you and your business at a later date.

A high credit score means you're a low-risk borrower, which could lead to a lower interest rate on your loan and save you money in the long run. Here are four simple tips to help improve your credit score:

  1. Always make payments on time. This is the number one rule of thumb when it comes to maintaining a good credit history. Late payments can seriously damage your credit score and impact your financial future.
  2. Keep your debt levels low. Never borrow more money than you can afford to pay back each month. This will help improve your credit score and keep you from paying interest on any balance.
  3. Pay down high-interest debt first. If it makes financial sense to pay a higher interest rate balance off first, such as a car loan or student loan, then do it.
  4. Don't open new credit accounts unless you absolutely have to. This may sound harsh, but the more credit you have available to you, the less likely it is that you'll be able to manage your debt effectively and maintain a good credit score.

4. Be Sure You’re in Business for the Past 3 Years

When you're self-employed, it can be difficult to get a mortgage. Lenders want to know that you have a steady income, and being self-employed often doesn't provide that certainty. However, there are two ways you can go about getting a mortgage when you're self-employed.

The first way is to have at least 3 years of consistent tax returns that show consistent income. This shows the lender that you're able to reliably earn an income and makes them more likely to approve your loan. The second way is to have a co-signer with a stable job and good credit score who can vouch for your ability to repay the loan.

Whichever route you choose, it's important to shop around and compare interest rates from different lenders.

5. Reduce Your Debt-to-Income Ratio

Lowering your debt-to-income ratio can help you save money and improve your credit score. When you have less debt, it’s easier to manage your finances and avoid potential disasters. Here are six tips to help you lower your debt-to-income ratio:

  1. Make a budget and stick to it. This will help you track where your money is going and make sure that you’re not spending more than you can afford.
  2. Get a HELOC or a low-interest credit card. This can help you pay off some of your debt and make it easier to save.
  3. Put money in an emergency fund. This will help if you ever need more cash in a hurry.
  4. Get a second job. This will help you build up emergency cash reserves and make sure that your regular income is sufficient to cover your monthly expenses.
  5. Start a small business. This will help you to build up your cash reserves and make sure that you are spending less than you earn.
  6. Alwsys shop around for the best interest rates on credit cards and loans. This can lower your monthly payments and save you money in the long run.

DTI calculation for a Self-Employed

  • Average income – $10000
  • Car loan payment – $1000
  • Other debts – $500
  • Home loan payment – $2000
  • Total monthly debt payments – ($1000+ $500 + $2000) = $3500
  • DTI – $3500/$10000 – 30% salary deduction
  • DTI Ratio – 50% (which is more than 43%)

6. Make Sure You Have a Guarantor

Obtaining a mortgage when self-employed can be difficult. One way to improve your chances of getting approved is to have a guarantor. A guarantor is someone who agrees to be responsible for the mortgage payments if you are unable to make them. This can be a friend or family member, and it's important to have someone you can trust in case of an emergency.

Keep in mind that guarantors are legally responsible for the mortgage, so it’s important to choose someone who is financially stable and has a good credit score. You should also make sure that both you and your guarantor fully understand the terms of the agreement, including how much money they could potentially owe if you default on your payments. If you don't have a guarantor, you may want to consider using a co-signer instead. A co-signer is someone who agrees to be responsible for the loan if you are unable to make the payments.

Wrapping Up

Being self-employed has its perks. You set your own hours, you're in control of your income, and you can be creative in how you run your business. But it's not all roses. Self-employment might cause you a lot of stress when it comes to mortgage approval.

Getting turned down for a self-employed mortgage can feel like a personal attack. You might be tempted to give up on your dream of buying a home, but don't despair. There are plenty of ways to get your foot in the door of the housing market.

First, remember that getting turned down for a home loan is not necessarily a reflection of your creditworthiness or ability to afford a mortgage. Your lender might simply be over-extended or not have the right product for your needs.

There are other lenders out there who would be happy to work with you. Start by talking to your current bank or credit union about their mortgage products. If they can't help you, try contacting a mortgage broker who will have access to a variety of lenders and products.

Finally, don't give up on your dream of homeownership.

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