How to Qualify for a Mortgage when Self-Employed

For many first-time mortgage applicants, the process of buying a house can seem daunting. Lenders need to know--as much as they can actually know ahead of time--that you’re a worthwhile risk who probably won’t default on payments.

Because of the financial risk that potential borrowers pose to lenders, there is a lot of paperwork required to get a mortgage. Lenders want to know what you do for a living, how long you’ve done it, your income, your net worth, and numerous other details about you so they can decide how much you can borrow and at what interest rate.

For these reasons, self-employed individuals might get nervous about the prospect of applying for a mortgage. They might believe there are certain obstacles standing in their way to getting one since they don’t have “regular” employment like others do.

This is not true. Self-employed contractors, freelancers, and business owners can get mortgages just like anyone else. However, there are some extra steps you might need to take to get approved if you’re self-employed.

Here’s what you need to know if you work for yourself and are looking to get approved for a home loan in Arizona.

Know What Lenders Want to See

The first step is to understand what mortgage lenders will want to see from you. There are certain financial details you’ll need to provide to lenders.

You will likely be asked to describe where you are self-employed and what you actually do. You may need to show the finances of your business, how stable you have been over the years, and your business’s capacity to continue producing income.

It is at this point that a lender will verify that you are, in fact, self-employed. That means that you will have to own 25% or more of your business. You’ll also likely have to prove that you have been continuously self-employed for at least two years.

You can also sometimes get by with just one self-employed year as long as you can show you were employed by someone else in your line of work for at least two years or received formal training in your industry.

What Paperwork You’ll Need

That covers the general information that mortgage lenders need to see. But what paperwork will you need to prove it all?

The documentation you may need includes two years of both personal and business tax returns, your business license, proof of communication with current customers, business insurance information, account information and balance sheets, and documentation from your certified public accountant.

Exactly what types of paperwork you’ll need depends on your specific situation, but these are the most commonly requested documents that you will most likely need to submit to a mortgage lender if you are self-employed.

Research Yourself

There are also some steps you can take on your own so you know what you can expect during the application and borrowing processes.

The point of all this is always to appear to reduce the financial risk you pose to the mortgage lender.

Debt-to-Income Ratio

One thing you can do is study your debt-to-income ratio, or DTI. This is a vital factor lenders use to determine whether to lend to you. Your DTI is the calculation of how much you make in income versus how much you owe in debts to other entities.

Your income alone can’t tell the whole story. Lenders also need to know what you owe from that income. Your business might generate $1 million a year but owe $700,000 in debts. That makes your actual yearly revenue only $300,000, which could change the story on what you can borrow.

So, it is incumbent upon self-employed individuals to analyze their DTI ratio to see what costs they might be able to eliminate before applying for a mortgage.

Check Your Credit Score

Your credit score is another factor that helps lenders get a picture of your financial health. You can check it before applying for a mortgage, although there won’t be anything you can immediately do about a low score if you’re applying for a mortgage now.

The higher your credit score, the more reliable you appear. FICO credit scores ranging from 670 to 850 are considered positive, while 669 and lower are not too impressive.

Your score will factor into how much you can borrow. Taking out a line of credit or personal loan in the past for your business may have affected your score at that time, but if you have stayed current on payments and are still financially sound, your credit score should have gotten healthier over time.

Shop for the Best Rates

The final bit of research you should do before actually applying for a mortgage is to shop for lenders. Each lender may have different requirements for self-employed individuals, and the amount of documentation you’ll need might help you determine who to put on your shortlist.

Additionally, different lenders will have different options with different interest rates. Search around for what works best for you.

Get Qualified with Castle Rock Mortgage LLC!

The final step is to get qualified for your mortgage! After going through all that hard work, if your numbers look good, your lender should approve you for a mortgage, and you can move on.

And it is a lot of hard work applying for a mortgage, especially for self-employed people who need to provide more paperwork.

Castle Rock Mortgage makes the whole process easier for you by finding the best rates for you based on your needs. We are mortgage brokers serving the entire state of Arizona.

Get in touch with us today to tell us about yourself and put us to work for you!