Obtaining a mortgage when you’re self-employed

Being your own boss can be a rewarding experience, but it can also pose certain challenges when it comes to taking out a mortgage. Lenders are wary of financial risk when providing home loans, making it more important for self-employed individuals to show that they are a stable investment.

Income
While most borrowers can show proof of steady income from an employer, self-employed individuals must go the extra mile to show that their income is just as secure. This means that self-employed borrowers should provide tax returns showing steady income. Since self-employed individuals are able to obtain more tax breaks, it can make it look as though they possess less income. It’s important to find the right balance between saving money on taxes and being able to show that you’re taking in steady amounts of revenue.

Self-employed borrowers should also be wary of irregular income. If there’s a large disparity between annual income, it can make a borrower seem inconsistent and incapable of keeping up with regular payments.

Time
If you’re newly self-employed, you may find it more difficult to obtain a mortgage. Lenders want proof that your income is steady. Making the jump from working for someone else to being self-employed can make lenders wary, meaning that individuals should allow enough time to pass to show that their self-employment will not result in less income. Those who have been self-employed longer will find it easier to prove they are not a financial risk.

Credit
A high credit score is an attractive quality in any type of borrower, but it may be even more important for self-employed individuals. Showing that you’re financially responsible and able to pay bills on time will help put lenders at ease. In addition, since mortgage rates may be higher for self-employed borrowers due to the inherent risk involved, a higher credit score may help borrowers obtain a lower interest rate.

Debt
Not only will paying off debt improve your credit score, it will also make you look less risky to lenders. An individual who has numerous financial obligations may not be able to stay current with mortgage payments. However, if you can show that you’re relatively free of debt, it will prove that you’re capable of devoting funds to your home loan.

Savings
Having extra money set aside can go a long way toward putting lenders at ease. If you have a considerable amount of funds in the bank, it will show that even if your regular income takes a hit, you’ll be able to keep up with mortgage payments.

 

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