If you’re self-employed, you may be wondering how you can get approved for a mortgage. While it is easier to get approved for a mortgage as a W-2 employee, you can get approved for a mortgage—you just might need a little extra paperwork.
At Landmark National Bank, we recognize how popular freelance work has become in recent years. Prior to the start of the pandemic, 34% of the workforce was somehow involved in the gig economy and 67% of employees said they intended to leave their full-time job for freelance work. No matter if you are or are thinking about making the transition to self-employment, this article will help you prepare the documents you need to get a mortgage for the home of your dreams.
What do lenders look at when you’re self-employed?
Generally, when you are looking to get approved for a mortgage, lenders look at your income, credit history, and debt-to-income ratio, or DTI, to determine what amount you are approved for. When you’re self-employed, lenders will look at these factors, but they will also look at income stability, the nature of your self-employment, the financial strength of your business, and your business’s ability to generate sufficient income in the future.
To determine these factors, you’ll need to provide a history of uninterrupted self-employment income going back at least two years. To further prove your income lenders might ask for additional information, such as:
- A letter from your certified personal accountant (CPA)
- A copy of any state or business license that you hold
- Evidence of insurance for your business
What if I don’t have two years of self-employment history?
If all or part of your income for qualifying for a loan comes from self-employment, your business must be active for a minimum of 24 consecutive months, otherwise, it might be best to hold off on seeking approval for a mortgage until your business hits that benchmark.
How can I improve my application?
When you’re self-employed, it’s important to make your application as strong as possible. Keeping a close eye on these factors will help make you a better candidate for a mortgage:
Pay close attention to your credit score
When lenders look at your application, they’re not just searching for a steady income; they also look at your credit score and use it to indicate your ability to make your payments and make them on time. So the higher your score, the better position you’ll be in to get approved for a mortgage.
Lenders also look at your credit utilization, which can boost your credit score if you opt to pay it down prior to submitting your application for approval.
Keep an eye on your debt-to-income ratio
Like any W-2 employee, keeping your DTI ratio below 38% is crucial for lenders to see. They use this information to determine your ability to make your mortgage payments. The more monthly debt you have coming out, the less money you have in your budget to make your mortgage payments. If your DTI is above 38%, however, start looking at what debt you can pay off to lower your DTI.
Pay off as much debt as possible
Paying off debt not only improves your DTI, but it can also improve your credit score. If you have outstanding debt that can easily be paid off, do it! Paying off your outstanding debts can also improve your credit score, or get you approved for a larger mortgage loan.
Offer a large down payment
When you put at least 20% down on a house, you’re not only avoiding paying the PMI, but you’re also putting equity into your house. Putting money down on a house also makes you a less risky candidate to mortgage lenders. A larger down payment helps mortgage lenders take your application more seriously, as you’re less likely from the equity you’ve put into your home.
Have significant cash reserves
In addition to making a larger down payment, it’s also good to have a significant emergency fund. You should be able to assure lenders that even if business revenue drops, you can continue making your mortgage payments.
Provide documentation of your income
Along with your two years of tax returns from your business, lenders may also ask for the following:
- In-depth documentation of your business’s write-off expenses
- Profit and loss statements
- Balance sheets, bank statements
- Other financial documentation
By having this documentation in order, you can improve your chances of getting approved for a mortgage.
Keep your business expenses separate
When you need to make business-related purchases, it’s best to charge those purchases to your business accounts; you can lower your personal accounts’ credit utilization and paint a clearer picture of your financial profile.
Choose Landmark to Help You Get Approved for a Mortgage
Following these steps will give you an advantage in the mortgage approval process and prove you are a reliable candidate for a mortgage.
Need help with this process, or looking for tools to manage your expenses? Visit one of our business banking experts at Landmark National Bank. Sweep services and online cash management are just a few of the robust products you’ll find among our full suite of business banking tools. Our business banking experts can also help you develop a roadmap as you prepare to submit your mortgage application.
If you’re self-employed and eager to buy your first home, reach out to one of our mortgage lenders, or visit one at a branch near you.