Qualifying for a Mortgage Loan
The home buying process remains the same whether you’re self-employed or otherwise. Where the main difference lies is in the mortgage application process. Without an employer to back you up, you might find that qualifying for a loan will be more challenging and tedious.
Here are a few ways to improve your odds of getting approved for a loan.
1. Documentation is key
Having proper documentation is one of the most important things you can do to increase your chances of getting a loan. Lenders may ask for quite a lot of documentation in order to verify your capacity to repay the loan. Among things they may require would be:
- Tax returns of the previous year
- Profit and loss statements
- Balance sheets
- List of debts and monthly payments
- List of assets
- Additional sources of income
- Proof of your business/employment
2. Maintain good credit standing
Whether you are self-employed or not, a good credit rating is one of the most important things to have (aside from income capacity) when applying for a loan. Lenders have always been quite strict when it comes to meeting the credit score requirements and they are continuing to make it harder for buyers to get mortgages. This is especially more challenging for self-employed individuals.
Different lenders may have different score requirements, but a good number to target would be in the high 600s to 700s. Combined with a low credit utilization (aim for sub-20% if you’re self-employed), you should be in good shape.
3. Create relationships early
If thoughts of purchasing a home find their way into your conversations with family or friends, it might be wise to take action sooner rather than later. Get in touch with lenders or your bank of choice and start discussing plans on how to proceed with the mortgage application and other things you’ll need to prepare for beforehand to facilitate a smooth process when the time comes.
Having good rapport with lenders will also come in handy down the line, so start building relationships with them early. Lenders who know your situation can help you find ways to increase your chances of getting approved. Matthew Griffin, a real estate agent with The Seeby Group at Keller Williams Realty Intown Atlanta has this to say: “Most of the time, lenders are happy to sit down and talk about the mortgage lending process. They can explain the do’s and don’ts. Most importantly, they can help set you up a game plan.”.
4. Place a larger down payment
One way to make yourself attractive to a lender is to place a larger down payment. Why? Well, it has a lot to do with equity and being invested. You see, people who have more equity in a home are more invested in it, meaning they won’t just up and disappear when met with financial challenges.
Moreover, banks will see that you have the financial capacity and won’t classify you as much of a risk. Of course, this is what you’re aiming for when trying to secure a loan.
So how much is a “large” down payment? Well, generally speaking, the asking price for down payments is about 20% of the price of the property. Having a sizeable down can offset having an irregular income.
5. Enlist the services of a mortgage broker
Shopping for mortgages can be taxing. This is where mortgage brokers come in handy. Simply put, they work as middlemen to help you find the best mortgage.
These brokers meet with you in order to gain an understanding of your financial situation by asking some information from you. They then relay this information to the different financial institutions they’re associated with, who in turn send their offers through the broker to you.
Since mortgage brokers operate independently of banks and other institutions, they can help you understand the different offers and steer you to a lender that can be the best fit for you.
However, this comes with its caveats. Since the brokers are paid via commission by the lenders, they can sometimes favor the lenders that will benefit them most, even if it means you won’t be getting the best deal. Of course, not all brokers operate this way and others genuinely want to help you get what you need.