Being your own boss comes with many advantages, like having a flexible schedule and no one to answer to but yourself. However, self-employment can also require more effort in some areas.
For example, you may have to take additional steps to get approved for a mortgage. This article discusses why it may be more challenging to get a mortgage when you’re self-employed. It also explores how to maximize your chance of getting one and tips for securing a mortgage when you work for yourself.
Some self-employed individuals may face a few challenges when it comes to securing a mortgage for a home. One reason is that some self-employed individuals may not receive a steady paycheck. While many people who work for themselves earn enough to afford a home, their income is often based on how well the business is doing rather than a reliable paycheck. This can make it more difficult to prove steady income, which can impact your chances of being approved for a mortgage.
Self-employed people often have multiple sources of income. This can make documenting income slightly more complicated.
Additional reasons why self-employment may make it more challenging when applying for a mortgage include:
A self-employed person’s income often varies throughout the year. For example, say your sales are influenced by the seasons. You may bring in a large amount of revenue in the summer and winter months, and make significantly less income the rest of the year. While your income may ultimately be similar to, or even higher than, that of a traditional employee, it can still appear to be less predictable to lenders.
Self-employed people often have multiple sources of income. This can make documenting income slightly more complicated. Plus, this income often fluctuates based on how the business is performing, so your income may appear less stable to lenders compared to applicants who are traditionally employed. While a traditional employee receives a W-2 tax form showing their exact wages, self-employed individuals often have various paperwork showing their income and related business write-offs or expenses. This can make it challenging for lenders to determine how much someone who is self-employed truly makes in a year.
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While traditional employees rarely have to worry about how well the company they work for is performing, this is a primary concern for business owners.
Many self-employed people often experience variations in the stability of their businesses. While traditional employees rarely have to worry about how well the company they work for is performing, this is a primary concern for business owners. Slow business can mean less income, and less income can mean the inability to make a mortgage payment.
Many business owners write off a large amount of their income as business expenses. And, when reviewing a mortgage application, most lenders consider a self-employed applicant’s income after expenses. So, for business owners who write off much of their income, they may have little left to be used to secure a mortgage.
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Despite the challenges that self-employment may pose, it’s still possible to secure a mortgage when working for yourself.
Another important factor that lenders consider when analyzing a self-employed applicant is the potential liabilities their business may have. This includes the financial strength, location and demand for the applicant’s business. For example, if you run a landscaping business and live in a cooler climate, your business slows down during the winter months. This can affect how capable you are of paying your monthly mortgage. The more liabilities you have, the more effort you may have to put in to qualifying for a mortgage.
Despite the challenges that self-employment may pose, it’s still possible to secure a mortgage when working for yourself. Consider the following to increase your chance of being approved for a mortgage while self-employed:
Credit score is a major factor in landing a mortgage no matter your employment situation. However, it is especially important for those who are self-employed. A high credit score demonstrates your ability to pay back loans and make payments on time, both of which are attractive to lenders.
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Having less debt shows lenders that you’ll be more capable of making your monthly mortgage payments, and could even help you qualify for a larger mortgage amount.
The less debt you have when trying to obtain a mortgage, the better you will look to potential lenders. Having less debt shows lenders that you’ll be more capable of making your monthly mortgage payments, and could even help you qualify for a larger mortgage amount.
A large down payment may make it easier to get approved, however, you should also consider establishing a significant cash reserve, such as an emergency fund, to show lenders that you have ample cash reserves to pay the mortgage in case your business doesn’t perform well for a period of time.
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Try to get a few years of self-employment history behind you before buying a home to prove to lenders that you can successfully manage a business.
Establishing a solid track record of running and maintaining a lucrative business can help when applying for a mortgage. Try to get a few years of self-employment history behind you before buying a home to prove to lenders that you can successfully manage a business. Lenders generally expect at least a two year history supported by tax returns.
Registering and licensing your business can increase its validity in the eyes of lenders. This can demonstrate longevity in your business’s life cycle.
This article was originally published on Chase.com