Self-employed individuals are sometimes not seen by lenders as good borrower due to their variable income and job security levels. They often endure having to pay higher mortgage rates compared to other borrowers who have excellent credit scores backed up by steady and verifiable income sources. Even if lenders will always view you in a different light initially, you can still prove yourself as a prime borrower. Here are some tips on mortgages for the self-employed.
An Attractive Candidate
One important mortgage tip for the self-employed is to make yourself an attractive candidate—at par with the salaried prime borrower. One way to do this is to offer a larger down payment. With higher equity in the loan, the less likely you are to walk away from the mortgage on the home, even during financial strain. However, you should have plenty of emerging funds to show to lenders too. Impress them at least two years of the recent statement of account. Either way, be sure to have an audited financial statement and documentation. With a higher amount of cash up front, while still having a significant amount of emergency fund, you make a strong statement about your financial capabilities which make you an attractive candidate for the loan.
Beefing up your income can obviously increase your chance of getting approved for a loan and getting favorable rates on mortgages. However, increasing your income alone does not do the trick. Lenders will not look at your income alone. Rather, they will generally look for two parameters: the related home debt payment should not exceed 28% of your present income, and your total recurring debt payments should not exceed more than 36% of your current income. Hence, improve your debt-to-income ratio by eliminating other debts and loans first such as credit cards, student loans, and car loans before acquiring a new one.
Different Mortgage Options
You can also explore different mortgage options that may be catered specially to you. One type of loan is stated income/stated asset mortgage. The mortgage rates you receive are based on the income you state to the bank without the bank requiring thorough documentation. Another option is no documentation loan through which the lender will not seek any verification of your income information. However, as these options are generally viewed as riskier compared to prime loans, low or no documentation loans tend to have higher mortgage rates.
Either way, whether you prove yourself a prime borrower or start off with low or no documentation loans, the key is to maintain a high credit score because, from this time onwards, your mortgage qualification process gets easier, and you get lower mortgage rates.