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You may have heard that getting a mortgage may be more difficult if you are self-employed. In part, that may be true, but it is not impossible. There are steps you can take to improve your chances of getting approved for a mortgage if you are your own boss.
First, you will need to understand what lenders will be looking for if you are applying for a mortgage. They want to ensure that you have a stable income to make timely monthly payments on your mortgage. This may require additional documentation to assess your creditworthiness. In addition, you will need to show:
- The location and nature of your business.
- The number of years your business has been operating.
- The financial strength of your business.
- The stability of your business and income.
Second, you will need to provide the following documentation (note that additional documentation may be requested from your lender):
- Tax returns (including personal tax returns and returns through your business)
- Profit and loss statements (often the request is that they be prepared by a CPA)
- Bank statements
Tips for a Starting Your Homebuying Journey
Here are some tips to help you put your best loan application forward.
Keep records of documents.
You will likely need to present at least two years of tax returns (personal and business) and other financial documents to verify your income. Keep meticulous records of all your business expenses, including receipts, invoices, and bank statements.
Build up your savings.
Having a healthy savings account can make you a more attractive candidate to lenders. This shows that you have a financial cushion in case of any unforeseen circumstances. Ideally, you should aim to save up at least six months’ worth of income.
Improve your credit score.
Your credit score is a crucial factor in determining whether you’ll be approved for a mortgage. Make sure to pay all your bills on time, keep your credit card balances low, and avoid opening new lines of credit. You can also check your credit score for free online and dispute any errors or inaccuracies. Note that there are 3 credit bureaus and they don’t all carry the exact same detail or give the same credit score. It is important to check and dispute with each entity respectively.
Getting pre-approved for a mortgage can help you understand what you can realistically afford. It also shows sellers that you are a serious buyer. When getting pre-approved, make sure to provide all the necessary documentation and be prepared to answer any questions the lender may have about your income and business.
Keep Business Expenses Separate.
If you charge business expenses to your personal credit cards, this could impact your credit score and your debt-to-income ratio. You want to keep business and personal expenses separate by giving each their own accounts and credit cards.
It is Not Impossible but there is a little bit more paperwork!
Buying a home if you are self-employed is not impossible. Many homeowners are successful business owners. Just be prepared to provide more documentation and answer more questions. And reach out to your local Axia Mortgage Advisor about loan options that may be available to those who are self-employed and are hoping to achieve the dream of homeownership.
*Pre-approval is not a commitment to lend.
Equal Housing Opportunity. Axia Home Loans is a registered tradename of Axia Financial, LLC. NMLS 27830.