Mortgages guidelines are getting tougher for self-employed borrowers to get approved. Whether you’re able to use conventional financing or a self-employed bank statement program, here are some ways you can help yourself to get approved when you run your own business.
Increase Your Down Payment
The more you put down, the less you will have to borrow to buy a home. Down payment translates into equity in your home and the higher down payment you have, the lower the risk to the lender.
Typically the higher down payment you have, will qualify you for a better interest rate. Only put as much down as you can reasonably afford, meaning don’t over extend yourself leaving you with no liquidity because you’ll still need to show reserve funds.
Have Additional Funds as a Cushion
These are considered “reserves” and the more you have saved up are looked at as a compensating factor and less risk to the lender. One month of reserves is equal to your total mortgage payment, PITI (Principle + Interest + Property Taxes + Insurance = 1 month reserves).
Having at least 6 months of reserves helps with approval and the more reserves you can show, the better it is going to look when trying to get approved.
Reduce Monthly Debts
All of your monthly debts plus your estimated mortgage payment are used to calculate your debt to income ratio (DTI). So by paying down/off your credit cards, any collections/charge offs, etc will help reduce your total DTI. The lower your DTI is the better chance you have at getting approved for a mortgage.
Give Your Credit Score a Boost
Your FICO score is extremely important for the mortgage application process and is almost like a preview of what you’ll be like as a borrower. The higher your credit score is generally reflects your responsibility with finances and spending habits, and a lower score usually means you’ve had some trouble managing your finances or had some speed bumps in the past that you’re still working on getting repaired.
Having a higher credit score when applying for a mortgage can save you thousands of dollars at closing and each month from the interest rate/costs you qualify for. So if there are a few items reporting on your credit that are affecting the scores considerably, spending a little bit of money with a credit repair company to get them taken off can save you a considerable amount.
If you don’t know what your score is or what is being reported then let me know and I can pull a credit report and we can go over it together in case you have any questions.
Self-Employment Work History
Typically we like to see a 2 year history of self-employment verified by your tax returns and when the business was registered with the county/state. The longer you’ve been self-employed and can document it, the better.
If you’ve been self-employed for less than 2 years, there are situations where that may be ok. Instead of listing every scenario I know of, it’s best to contact me and we can go over the details on the phone or email.
The Next Steps
Now that you know the basics of how to increase your odds of getting approved for a mortgage being self-employed, you can submit an application, request additional information, or contact me directly. I look forward to hearing from you!
This week I noticed that #National Freelancers Day was trending on Twitter, which got me thinking. The UK workforce has changed beyond all recognition over the past twenty, ten or even five years.
The numbers of self-employed people are increasing on a daily basis with a recent statistic showing that there are 4.85 million in that category, representing around 15 per cent of the UK workforce.
The introduction of technology over this period has helped create different forms of revenue-generating opportunities and provided a stronger platform for people to branch out on their own and better support their invoicing, financing and general business needs.
But how is the mortgage market meeting the needs of the self-employed community?
Knowledge Bank recently suggested that it has seen a significant rise in the number of brokers searching for lenders who would accept self-employed borrowers. It found that this featured in almost every monthly list and the search for loans for self-employed borrowers has been in the top two for 10 out of the past 12 months.
We’ve also recently seen a call from Trussle for a collaborative effort from the industry and the Government to better support the self-employed. Suggestions include integrating Open Banking to help those with multiple income streams, becoming more flexible with tax reporting periods, and assessing self-employed mortgage applicants on their current, and not historic, income.
Although wider lending support from the mortgage market for the self-employed is hardly a new issue, its interesting that this data and call for change have been made by technology-led firms.
For far too long the high street has ignored the mortgage-related needs of self-employed borrowers. While it is still possible for them to obtain a mortgage direct from the high street, they are likely to be highly restricted by the choice of available products to suit their unique borrowing needs. Thankfully, there are a number of lenders who are now stepping up to the plate. For example, Coventry for Intermediaries has just widened its lending requirements for self-employed daily rate contractors. This includes the requirement to show evidence of a minimum of 12 months’ experience in the same line of work, reduced from 24 months from the main self-employed policy, and to have a minimum of six months left on their current contract.
Self-employed people have been unfairly tarnished as a higher risk lending proposition and it’s great to see a wider variety of providers realizing this and implementing some positive criteria changes and product enhancements. It’s also fair to say that many areas outside of the most mainstream of mainstream borrowing have been vastly underserved in recent times. Thankfully, technology is helping to better connect intermediaries with the right kind of lending solutions for those clients who are still being overlooked by high-street lenders, although there remains plenty of room for improvement.
Choice, flexibility and accessibility are all key components in keeping up with ever-changing modern borrowing demands. So, make sure you find the right partners and systems which can help you find the appropriate outcomes to match your self-employed client’s needs and those of many others who could benefit from the specialist mortgage market.
Written by Neal Jannels via financialreporter.co.uk
June 26, 2019