Steps To Qualify For a Mortgage When Self-Employed

7134101805_f32bb89296_zI’m the type of person who likes to plan things way in advance. So, it only makes sense that I am currently thinking about our mortgage for our next home.

As a refresher, we are thinking about buying our next home within the next two years. We don’t think we want to stay in St. Louis, and we are looking at moving possibly to Colorado or Florida. Yes, yes, I know these two states are completely different, but they both have some great advantages of living there.

Getting approved for a mortgage these days is a little bit harder in the past. I remember when we bought our first home, the process was a breeze. Our loan officer even told us that we were the easiest loan he’s ever done.. I have been told that I will not be that lucky this time around because rules are more strict and because we are now self-employed.

You will want a good credit score.

A good credit score is needed whether you are self-employed or not these days, but you will need something a little better if you are self-employed. You will most likely want a credit score above 740 in order to qualify for a loan from your bank.

We are wanting to have our credit score be as near perfect as we possibly can get it. Currently, we are both in the 760 range. It would be higher but we’ve been travel hacking, which has slightly lowered our credit score.

You will want a large down payment.

For the home we live in right now, we paid a very small down payment towards it. Because of it, we also pay PMI, and that’s something we don’t want to do again.

Also, most mortgage companies will want a self-employed person to put down more than 20% on a home because they want to know you are invested in it.

I have heard of some banks asking for between 25% to 30% as the down payment. That is a lot of money that we will need to save before we even start looking for a home!

Lower debt to income ratio.

If you are buying a home, then you will need to work on your debt to income ratio, especially if you are self-employed.

Your loan officer will most likely want to see something below 40% so that you are not overwhelmed with a loan. We will be much lower than that thankfully, so this is not an area we need to worry about.

You will want an increased income.

Most self-employed people deduct routine business expenses from their taxes in order to decrease the amount they owe in taxes. However, this may count against you when applying for a mortgage because your loan officer is going to look at your bottom line to determine how much of a home loan you can afford.

The bank will usually average your last two years. However, if you made less money in the most recent year than the year before, they might only take that number.

Work history.

If you are self-employed person, most banks will ask that you have at least two years of self-employment experience. If you have less, then they may turn you away completely or give you a higher interest rate.

How was the mortgage process the last time you bought a home? Did anything go wrong?

If you are self-employed, please, especially, share your experience! 

 

Image via Flickr by Billy Metcalf Photography


Comments

Steps To Qualify For a Mortgage When Self-Employed — 20 Comments

  1. Ha! Got a few hours to talk about how our mortgage process went?! Maybe it needs it’s own blog post instead of being left in your comments section. 🙂 Thanks for the idea! I’m always so impressed by how you approach the financial decisions in your life. I’m sure you’ll end up on top. Good luck with the process! It certainly is an exciting step.

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  3. Good luck with your next home – I’m sure it won’t take you long to save your deposit 🙂 when we were buying our first home, the thing that took so long were the letters backwards and forwards between bank and solicitor. Mainly due to the person we were buying the house off. Still, it was worth it in the end 🙂

  4. I was wondering about this a few weeks ago. I guess it makes sense to have a 2 year window on earnings. If you want info on Colorado, etc feel free to pick my brain at FinCon!

  5. I did mortgages for 7 years before I quit to stay home with my daughter. You can actually find plenty of places who will give you a mortgage with far less than 20 percent down if you are self employed…. But we know that’s not always the wisest choice!
    The biggest problem I saw with self employed borrowers, time and time again, was seeing them write off all their Income on their tax returns. Some would come in trying to buy a 300k home and say, “I made 90k in self employed income last year,” but then most or all of it was written off when they provided their tax returns, making it look like they made nothing. The mortgage company will look at that lower number. As long as you don’t fall into that trap, you should be golden! At least you are thinking about this far ahead of time, which most people don’t!

    • Well that’s good to hear! I keep hearing from mortgage bankers and self-employed people that ever since the recession that it’s been much more hard for self-employed people to get a home loan at a good interest rate. I hope you’re right 🙂

  6. We did a standard mortgage, with a very low interest rate, on our current home (which will become a rental once we retire early). For our second home, which will be our primary residence once we’re retired, we plan to pay all in cash since we won’t have consistent incomes anymore. It’ll be interesting to see how that process plays out as opposed to our conventional first home. P.S. I didn’t realize you lived in St. Louis! My family and I lived there for 10 years and I went to high school there!

  7. Thanks for the tips. You make some really good points. My husband’s self employed now and I know we were lucky that we had a mortgage before he made the change; otherwise it would have been really hard to qualify.

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