In the U.S., 6.6% of all workers are self-employed. While self-employment offers you a lot of economic freedom, it can make it more difficult to get a loan. If you are self-employed, there are five things you can do over the next two years to make sure you are approved for a home mortgage when you are ready to buy a home.
Expect to Offer at Least a 20% Down Payment
Traditionally, buyers have been expected to contribute at least 20% of the cost of the home they are purchasing as their down payment. Recently, lenders have been accepting lower down payments, such as 10%, as long as the borrower purchases adequate home insurance. In 2015, borrowers can expect to get loans from private lenders with as little as 3% down, which opens up the market for many buyers. Unfortunately, self-employed borrowers will most likely not be the recipients of these loans.
As a self-employed person, you represent a greater risk to lenders. Because of this, you should expect to be asked to pay the traditional 20% as a down payment if you want a decent interest rate.
Take Fewer Deductions and Save Documentation for Those You Take
If you are self-employed, then you are likely aware of the many deductions you can write off as business expenses in order to claim less income when you file your taxes. While this saves you money each year, it can make your financial status look worse than it actually is to lenders. For at least two years before you apply for a loan, you should avoid taking unnecessary deductions so that your tax forms reflect your actual earnings.
If you are thinking about purchasing a home in the next 2-3 years, you should consider tapering your deductions a little each year. This will not only show a larger income, but it will also present the appearance of a rising income, which is important to lenders.
Organize Files of Your Personal and Business Finances
Unlike a traditionally employed person, your business finances and personal finances are entwined much more deeply. For this reason, your lender will want thorough copies of not only your personal expenses but also your business expenses. It will be easiest for you if you keep detailed files of all major purchases and debt for you and your business for the two years before you apply for a loan.
If you are applying for a loan soon, then you should do your best to collect information for the past two years before your lender asks for it. This will show you are organized and ready for a loan.
Start Shopping For a Loan Early
It is recommended that traditional home buyers start shopping for a loan and getting good faith quotes from sites like http://www.firstmortgagecompany.net two months before they are ready to purchase their home. This allows them time to bargain with lenders and secure the best deal without delaying the closing process. Unfortunately, if you are self-employed, you will need to start shopping a bit earlier.
Self-employed people generally receive 6 quotes from lenders for every 10 quotes a traditionally employed person receives. This means that it may take you more time to find an offer that fits your budget. Also, since more paperwork tends to be involved if you are self-employed, the approval process can take longer than normal. You should start shopping for a loan 3-4 months before you want to purchase your home.
Consider Alternative Loans
A new twist on an old type of loan allows you to use alternative methods to verify your income. These loans, known as stated income loans, will allow you to use your bank balances and other proof over the past two years to state your income instead of relying solely on your tax records. If you were unable to plan ahead with your taxes, this may be an option for you, but you should watch out for higher interest rates on this type of loan.