True or false – it’s nearly impossible for a self-employed worker to qualify for a home mortgage loan?
False. While self-employed applicants sometimes need to work a little harder to prove that they are as creditworthy as traditional workers, that doesn’t mean getting a loan for their dream home is out of the question.
However, your self-employed, freelance, or independent contractor clients do face a couple of potential challenges when applying for a mortgage.
- Verifiable income: Lenders don’t always see the self-employed as ideal borrowers compared to those working as employees. That’s because employees can more easily provide steady, easily verifiable income information, especially if they also have excellent credit scores.
- Reduced taxable income: One of the advantages of being self-employed is deducting business expenses to reduce taxable income on tax returns. However, when it comes to borrowing, that can be a potential issue. Because the income appears lower, lenders may wonder if the self-employed borrower makes enough money to afford a home.
- Pandemic effect: The economic fallout caused by the pandemic has impacted lenders’ requirements. Some are now expecting higher credit scores, larger down payments, and additional documentation to approve mortgages and other loans. While this could be a hurdle for self-employed borrowers, it’s also affecting traditional applicants. It’s also not the case with Amerifirst, which has no credit overlays on FHA, VA, or USDA home loans.
While these hurdles can be frustrating and make the home-buying process more stressful or drawn out, with the proper documentation, research, and preparation, your client can easily overcome them. And, as their trusted agent, you can guide and encourage them through the process to make sure their home-buying journey ends on a high note.
Tips to Prove Creditworthiness
Here are 4 tips you can give your self–employed home mortgage applicants to help them present themselves as more attractive loan candidates.
1. Establish a self-employment track record
Lenders are looking for consistency when it comes to income. Some fluctuation is acceptable, but income should trend upward. Ideally, your client should have at least two years of self-employment income in the same industry. But of course, the longer, the better because it shows that their income is stable.
If your client is newly self-employed, some lenders may make an exception if they have one year of self-employment tax returns and W-2s from an employer in the same field.
2. Maintain clean business records
If lenders can easily see and understand business income, that will work in your client’s favor because there will be fewer questions from the processor and underwriter. Advise your self-employed clients to separate business and personal finances by using business checking and savings accounts and credit cards.
They should keep track of invoices and monthly expenses and create an updated earnings statement at least every three months. They should retain records when they file taxes each year. Keep as many receipts, invoices, and financial statements as possible. When in doubt, save it.
Lenders may also ask for some or all of the following:
- Two years of federal income tax returns (personal and business)
- List of debts and monthly payments
- Recent business bank statements
- A year-to-date profit-and-loss statement that shows revenues, expenses, and net income
- A copy of the business license
- List of assets (savings accounts, investment accounts, etc.)
- Additional sources of income (alimony, Social Security, etc.)
- Proof of business or employment (business license, letters
from clients, statement from an accountant, etc.)
3. Max out the credit score
This is true for all applicants – a higher credit score makes a borrower more attractive, no matter their employment situation. Your client can boost their odds of getting approved for a mortgage as a self-employed borrower by improving their credit score and credit history.
They can make this happen by paying bills on time, whittling down debt, correcting errors or red flags on credit reports, and not going over credit limits on revolving (consumer) credit accounts.
4. Have significant cash reserves
Having a nice stash of cash for emergencies, medical bills, or home repairs is another way your self-employed can score points with lenders. Demonstrating the ability to save money and manage it well is a good selling point when applying for a mortgage.
It’s also a solid strategy for making sure that if business comes to a halt or has a bad quarter, your client will still have the ability to make home payments.
*Not all borrowers will qualify. Contact us for more information on fees and terms. Not intended as legal, financial, or investment advice. Contact your financial representative for more information.
Fontinelle, A. (2021, January 22). How to get a mortgage when self employed. Retrieved April 15, 2021, from https://www.investopedia.com/articles/mortgages-real-estate/08/self-employed-mortgage.asp
Getting a mortgage when you’re self-employed? (n.d.). Retrieved April 15, 2021, from https://loans.usnews.com/articles/can-you-get-a-mortgage-if-youre-self-employed#:~:text=%28Getty%20Images%29%20If%20you%27re%20self-employed%20and%20want%20to,you%20don%27t%20have%20a%20W-2%20or%20recent%20paycheck