Securing a mortgage may be a difficult effort for anyone, but for self-employed people, the process may seem considerably more onerous. Lenders often view self-employed borrowers as higher-risk applicants due to fluctuating incomes and a lack of traditional employment. However, being your own boss shouldn’t stop you from securing the best mortgage rates. With the right strategies and preparation, you can still get a great deal.
In this blog, we’ll cover some essential tips on how self-employed individuals can position themselves to obtain the best mortgage rates and increase their chances of approval.
1. Organize Your Financial Documents
One of the biggest hurdles for self-employed individuals is providing consistent income. Traditional borrowers often provide W-2 forms and pay stubs to verify their income, but self-employed individuals need to go a step further.
To ensure you get the best rates, make sure you have the following documents prepared:
- Tax Returns: Lenders will typically want to see two to three years of personal and business tax returns to verify your income.
- Profit and Loss Statements: These help demonstrate the financial health of your business and can offer a clearer picture of your earning potential.
- Bank Statements: Lenders may request several months of bank statements to confirm that your income is steady and sufficient to cover mortgage payments.
Having organized and detailed financial records will make you a more appealing candidate and may improve your chances of securing favorable rates.
2. Boost Your Credit Score
Your credit score has a big impact on the mortgage rates you’re offered. The higher credit score, the less risk you offer to lenders, and the more likely you are to qualify for competitive rates. For self-employed individuals, it’s especially important to maintain a strong credit score since lenders may already view your income as less predictable.
Here are some ways to improve or maintain a strong credit score:
- Pay Down Debt: Reducing your outstanding debt can have a good impact on your credit score and lower your debt-to-income ratio, a key metric lenders consider.
- Make Timely Payments: Ensure you consistently pay bills and existing loans on time. Late payments can majorly harm your credit score.
- Avoid New Debt: Refrain from taking on new loans or opening credit cards in the months leading up to your mortgage application, as it could negatively affect your credit score.
A credit score above 700 is perfect for getting the best mortgage rates, though requirements can vary by lender.
3. Increase Your Down Payment
A larger down payment may help you achieve the best mortgage rates. Lenders prefer borrowers with big down payments since it reduces their overall risk.
Self-employed individuals can benefit from making a down payment of at least 20% of the home’s buying price.
- Qualify for Better Rates: A higher down payment reduces the lender’s risk, increasing your chances of receiving a competitive interest rate.
- Avoid Private Mortgage Insurance (PMI): By putting down 20%, you won’t be required to pay for PMI, which can save you money in the long run.
Even if you can’t put down 20%, saving for a larger down payment still shows lenders that you’re financially responsible and can help you access better rates.
4. Show Stability in Your Business
Lenders value financial stability, especially when it comes to self-employed borrowers. A steady business that has been in operation for at least two to three years is a strong indicator of financial reliability. When assessing self-employed applicants, lenders will look for consistency in both your business’s revenue and personal income over time.
To demonstrate stability:
- Provide Historical Data: Show consistent or growing income trends in your tax returns and profit/loss statements over the past few years.
- Avoid Major Business Changes: Refrain from making significant changes to your business, such as switching industries or restructuring, during the mortgage application process.
The longer you can show stable business performance, the more confident lenders will be in offering you favorable rates.
5. Work with a Mortgage Broker
Managing the mortgage process can be difficult, particularly for self-employed people. Working with a mortgage broker can support you find the lowest rates and lenders for your unique financial condition.
A mortgage agent serves as a liaison between you and few lenders, enable them to:
- Shop Around for Rates: Brokers can evaluate rates from different lenders to obtain the best offer for you.
- Identify Lenders Who Work with Self-Employed Borrowers: Some lenders specialize in working with self-employed individuals and may offer more flexible terms or requirements.
Mortgage brokers have access to a big network of lenders, which increases your chances of getting the best mortgage rates.
6. Reduce Your Debt-to-Income Ratio
Lenders scrutinize your debt-to-income (DTI) ratio when analyzing your mortgage application. To determine your DTI ratio, divide your monthly loan payments by gross monthly income. A lesser DTI ratio indicates that you have a good balance of income and debt, which is especially significant for self-employed borrowers.
To lower your DTI ratio:
- Pay Off Existing Debt: Before applying for a new mortgage, pay off any credit card balances, vehicle loans, or other debts you have.
- Increase Your Income: If possible, work to boost your business’s revenue or take on additional income sources.
- Avoid New Debt: Hold off on taking out any new loans or lines of credit until after you’ve secured your mortgage.
Lenders typically prefer a DTI ratio below 43%, and having a lower ratio could help you qualify for better rates.
Final Thoughts
Being self-employed doesn’t mean you’re out of options for getting the best mortgage rates. By organizing your finances, boosting your credit score, and working with an experienced mortgage broker, you can assure a loan that suits your needs at a competitive rate.
At AKAL Mortgages, we specialize in helping self-employed individuals navigate the mortgage process and find the best rates. Our team is ready to assist you in making your dream of homeownership a reality, even if your income isn’t from a traditional job.