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!