What Do Lenders Want to See from a Self-Employed Borrower? – Are you a self-employed borrower hoping to buy a home in the new year? Qualifying for a mortgage without traditional proof of employment and income may sound scary, but when you work with a lender who specializes in creating solutions for self-employed borrowers, you don’t have to stress. We have helped many clients in your position, and are excited to help you too.
Contact us any time to find out if you are ready to qualify for a mortgage as a self-employed person.
In the meantime, we can answer some of the most common questions about qualifying for a mortgage as a self-employed borrower.
What Do Lenders Want to See from a Self-Employed Borrower?
Whether you are self-employed or have traditional employment, lenders are looking for the same thing. They want to assess your ability to regularly make your mortgage payments, in order to minimize the chance that you default on your loan (a scenario neither the borrower nor the lender wants).
The way mortgage underwriters determine your ability to repay a loan is by looking at:
- Your income
- Your assets
- Your credit history
- Your current debt
If you are self-employed, the lender will want to see the stability of your income, your income history as a self-employed person, and the nature and location of your business.
What documents will I need to show?
When you apply for a mortgage as a self-employed person, you can apply with traditional proof of income or you can apply for a bank statement loan. To learn more about bank statement loans and how they work, check out this post.
If you don’t choose the bank statement loan route, you will need to show your income history, usually for the past two years. Documents that might help establish your income could include:
- Letters from your clients
- A letter from your CPA
- Business License
- Business Insurance
- Membership in a professional organization
How can I financially prepare?
To put your best foot forward on your application, pay attention to the financial indicators that lenders look at to determine your eligibility.
Debt-to-Income Ratio
Tampa Florida Buyer’s Broker Eve Alexander offers this information: “Your debt-to-income (DTI) ratio tells your lender how much debt you have already taken on. They want to make sure that the addition of your monthly mortgage payment will reasonably fit within your income.
Your DTI is calculated by adding up the minimum monthly payments for all your current debts and comparing them to your gross monthly income. For example, if your gross monthly income is $5,000 and your monthly debt payments add up to $1,000, you have a 20% DTI.”
Credit Score
Your credit score is the number that tells your lender how well you handle debt. Credit bureaus determine your credit score by looking at how much debt you have, the kinds of debt you have, your payment history, your credit utilization rates, and any late payments on your record.
If your credit score isn’y where you want it to be, don’t worry. There are plenty of things you can do to work on improving your credit. Start by making sure you have automatic payments set up so you never miss a payment, and ask all your creditors to raise your credit limit to immediately improve your utilization rate.
Business Expenses
As a self-employed person, it can be easy to mix person and business expenses. This may not present a major problem for you in your personal finances, but it can cause problems for your mortgage application when. Do your best to keep business expenses separate in order to provide a clear picture of your financial situation before you apply.
To learn more or find out what you can qualify for, contact us any time!
