Trying to buy a home—and apply for a mortgage—can be scary. You find yourself thinking …
Will I qualify?
Do I make enough money to cover my monthly payments?
What sort of interest rate will I get?
What if I lose my job?
They’re all valid fears. But for a self-employed person? Those fears are elevated to a different level.
Without regularly scheduled paychecks, an employer to verify your income, or a long history of direct deposits to your bank account, it’s easy to think a mortgage lender won’t come near you. In fact it’s why many self-employed people don’t even attempt to buy a home in the first place.
Resigned to a life of renting and paying someone else’s mortgage, most throw in the towel before they’ve even started.
As a longtime self-employed person myself, I totally get it. Making any big purchase is a little scary (let alone the biggest purchase of your life), and when you don’t have the safety net of a predictable paycheck every Friday, it can be even more overwhelming.
But I’m here to tell you something: TRY ANYWAY!
As long as you take your time, do a little prep work and get your finances and credit in order, securing a mortgage isn’t just possible, it’s an inevitable part of your future.
When it comes to self-employed borrowers, the biggest worry lenders have is that they won’t make enough money to cover their mortgage payments. If a borrower doesn’t pay their mortgage, the loan goes into default, and the lender may be forced to foreclose on the property. It’s a long, time-consuming and costly process—and it’s one most lenders want to avoid as much as possible.
So your main goal when applying for a mortgage as a self-employed person is pretty simple: You need to prove to your lender that you can pay your monthly mortgage installment.
Now, with a typical borrower—one with a 9-to-5 job—this requires a simple employment verification form from HR and a look at your bank statements. Through these items a lenders can verify how much you make, how often you make it, and what you can afford to spend.
For a self-employed borrower, things aren’t as cut-and-dry. You may get paid 10 times in one week from various clients, and then no more for the next month. You could make $10,000 one month, and $3,000 the next month. You might have payments coming in from 10 different sources, including checks, PayPal, Venmo and cash, making it even harder to track down and assess.
All this combined makes it very hard for a lender to grasp your full financial picture, and therein lies the problem.
So how do you fix this? There are a few things you can do to make it easier on your lender to assess your financial state:
Set up a designated bank account for your business.
Separating your personal expenses from your business expenses and income can be pretty difficult for a lender when they’re all intertwined. Set up a designated account just for your business, and deposit all payments you received directly into it. Use the account to pay yourself, as well as for any expenses you might incur during the course of business. This will make it easier for a lender to assess how much your business actually makes and spends over the course of each month.
Keep good records.
Use accounting or invoicing software to manage all the financial aspects of your business. Wave is a personal favorite of mine, because it lets you send out invoices, track payments and expenses, and create reports. You can even filter income by month, year and client. These types of reports are perfect for showing a lender exactly what you make and how often.
Incorporate your business – and write yourself paychecks.
If you’re simply working as a contractor, consider incorporating your business as an LLC. Then, set up weekly or bi-weekly direct deposits (in a set amount, like a salary) from the business to you. This essentially puts you on the same playing field as traditional 9-to-5 borrowers; you have regular, scheduled income that you can show via your bank statements.
Show proof of other payments.
If you can show your lender that you’ve covered other monthly payments successfully—and for an extended period of time—it can also help your case. Show copies of your past years’ rent checks and get copies of your statements from monthly gym memberships, phone bills and utilities. In some cases, you can even use your student loan payments to show your ability to pay (See my recent post about this for more details.)
Proving you can pay is just one part of the puzzle though. If you really want to ensure you can get a mortgage (and at a good rate), there are a few other steps you should take, too.
Choose the right lender.
All mortgage lenders are not created equal—not in any way, shape or form. Many, many, many of them are of the old-school thinking that the ability to pay hinges on a weekly paycheck from a Fortune 500 company. If you don’t have that, you either don’t qualify, or you’re stuck with an insane rate that even Meryl Streep couldn’t afford. Those are the lenders you want to avoid.
As a self-employed person, you’ll want to look for a more modern lender—one who recognizes that jobs (and income) come in many forms and that many of today’s borrowers require a more creative solution.
Beef up your savings if possible.
It never hurts to have a little extra savings going into the application process. After all, the more you have for a down payment, the lower your monthly mortgage installments will be—and the less of a risk you are to your lender.
Get a co-borrower.
If you’ve got a spouse with a 9-to-5, by all means, get them to apply along with you. It can only help your case to have additional income. If that’s not possible in your situation, see if you can get a parent, sibling, grandparent or another party with a stable financial situation to be your co-borrower. This will give your lender a little peace of mind if they’re worried about inconsistent income.
Watch your spending.
This one applies to anyone getting a mortgage, no matter what their job may look like. If you’re planning to apply for a mortgage, you should avoid any big-ticket purchases in the months leading up to your application. That means no new cars, expensive vacations, furniture or other items. In many cases, these are items that will only add to your monthly costs and your credit card debt—both things that can hurt your ability to secure a mortgage.
Boost your credit score.
A good credit score means you have plenty of credit history and you pay your bills on time, every time. Though you can qualify for a mortgage with a credit score as low as 580, it won’t be easy—and your rates will be on the high end. If you can get your credit score up into the 700 range (or higher), you’ll be much better off.
Don’t count yourself out of homeownership. Whether you’re a self-employed entrepreneur, a recent grad with loads of student debt or a part-time worker still in school, your dream home is well within reach.
Interested in talking to a Mortgage Advisor to see how SnapFi might be able to help you? Setup a short conversation today!