Qualifying for a self-employed mortgage without a traditional job may sound stressful. When you realize that your lender will need proof of income, and your income is variable or has a shorter history because you are self-employed, you may be wondering how you can still qualify. The good news is, there are many loan and self-employed mortgage options for you a self-employed person and it does not have to limit your ability to buy a home you love!
To talk with a loan officer and find out what you might be pre-approved for, contact us any time! Our clients’ testimonials speak for themselves; we have helped many people buy their homes and we can’t wait to tell you more about how we can help you, too.
What to Do Before Applying for a Self-Employed Mortgage
What to Focus On
Your loan officer will need to see information about your income and employment, but self-employed applicants don’t have to worry. Your approval will be based on a list of factors, not just your current job.
These include some factors that you can focus on to improve your chances of qualifying for the loan you want, like:
- Credit score
- Debt-to-income ratio
By improving these two factors, you can make a significant impact on your application.
What is a credit score?
Your credit score is a 3-digit number assigned by three national credit reporting bureaus to reflect how well you handle debt. Credit bureaus take a variety of factors into account when assigning you your credit score, and continually watch these factors to make changes to the score that reflect your changes in behavior.
The factors that are taken into account to determine your credit score include:
- Payment history (your record of on-time or late payments on any debts)
- Credit utilization rate (how much of your credit limit is carried as a balance each month)
- Types of credit accounts (a variety of types of debt, like installment loans, car loans, home loans, and credit cards)
- Length of credit history (the longer your history, the more information credit bureaus have to base your score on)
- Recent credit activity (recently opened accounts will temporarily lower your score)
How can I raise my credit score?
As you look at the factors that determine your credit score, consider which might be something you can adjust. Lowering your utilization rate is one excellent way to impact your credit score for the better. You can do this in two ways: paying down the balance and requesting to have your credit limit raised.
For example, if you have a credit card with a limit of $2,000 and you currently carry a $1,000 balance on it each month, your current utilization rate is 50%. If the limit is raised to $5,000, you have immediately lowered your utilization rate to 20% without paying any of the balance down. In the same example, if you pay $500 of the balance down (without raising the credit limit), you have decreased your utilization rate from 50% to 25%.
Another simple way to raise your credit score is to set automatic payments for every debt payment, even if the automatic payment is just for the minimum amount. It is far better for your credit score to make a minimum payment on time and consistently than to incur late fees and have a record of inconsistent payments, even if you are paying well above the minimum.
What is my debt-to-income (DTI) ratio?
Another element that determines your mortgage approval status is your debt-to-income (DTI) ratio. This is the ratio of your minimum monthly debt payments to your overall monthly pay. For example, if you take home $5,000 each month and pay $500 in debt payments each month, your DTI is 10%. In general, your lender will want to see a DTI of 43% or less.
How can I improve my DTI?
If your DTI is currently higher than you would like it to be, prepare for mortgage application by focusing on bringing that ratio under control. You can improve your DTI by:
- Paying off debts with the highest monthly payments first, regardless of overall balance or interest rate
- Use a balance transfer to lower your interest rate and/or monthly payments
- Refinance any loans you can, like student loans or car loans
To learn more about qualifying for a mortgage as a self-employed person, reach out to us any time! We are here to help.