Venturing on the path to homeownership as a self-employed individual could become a bumpy ride. The worries of fluctuating income and additional paperwork might make some mortgage lenders skeptical. Yet, augmenting your desirability as a loan applicant is not an impossible feat.
There is no denying that being a self-employed borrower can be challenging. Traditional employees have the advantage with verifiable, constant incomes and excellent credit scores. However, if you are self-employed, you may need a larger down payment and to furnish proof of an income history of at least two years, supported by tax returns.
Successful navigation of self-employment is an attractive trait for lenders. Diligent tax record-keeping and a stable or escalating income can boost your credibility. A higher credit score can improve loan approval odds and qualify you for lower interest rates.
Investing a hefty amount upfront in your home's down payment also makes you seem less of a financial liability. Similarly, having a healthy emergency fund gives the reassurance of your capacity to maintain your monthly housing costs even if your business faces a downturn. Reducing your monthly debt payments would also aid in this process.
Full documentation of your income using tax returns, profit and loss statements, balance sheets, and bank statements can improve your chances of mortgage approval.
Bear in mind, there are alternatives if you cannot qualify for a conventional mortgage. A Federal Housing Administration (FHA) loan, designed for low-to-moderate-income borrowers, only mandates a down payment as low as 3.5% and lower credit scores in comparison to conventional loans. The federally-insured nature of the FHA loans lets the lenders offer lower interest rates and more favorable terms of the loan.
Also, bank statement loans, or alternative document loans, can help. Using your bank statements to demonstrate income instead of tax returns and W-2s is a viable option. Another approach can be acquiring a joint mortgage with a W-2 employee co-borrower to provide a steady income source assurance to your lender.
There is a common misconception about self-employed individuals' job security. Their diverse client base provides a safety net, unlike single employer-dependent W-2 employees. Yes, it can be harder for self-employed individuals to get a mortgage, but not impossible. A researched approach to different lenders and loan estimates can help secure the best possible deal. Stay determined and patient. Your entrepreneurial skills will not only help you in your business journey but also on the road to owning your home.