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Getting a Mortgage When Self-Employed
Are you self-employed and looking to get a mortgage? You may have heard that getting a mortgage when self-employed is more difficult than those who receive a W-2 since you are considered higher risk. But don’t let that discourage you! With the right financial planning, documents, and time you can get the mortgage you need while self-employed.
Keep Accurate Records
As a self-employed worker, it is crucial that you keep accurate records of both your business and finances. Why? Because having good, complete records will not only help show lenders that you can make your payments, but also help you dispute claims, prepare financial statements, and confirm your income.
Lenders will look at your income and other financial records over the last two years and average everything out if your income is inconsistent. For example, if you made $25,000 one year and $75,000 the next, lenders will average your income out to be $50,000. So be sure to do the math before you apply so you know what you are getting into.
Have Good Credit
Like all applicants, it is essential that you have good credit when applying for a loan. But while self-employed and looking for a mortgage, you especially need to show lenders that you are able to pay your debts on time. A good credit score can also get you a larger loan and lower interest rates.
Avoid Mixing Business & Personal Transactions
Whether large or small, keep business purchases off of your personal account and vice versa to avoid financial confusion when it comes time to apply for a mortgage. If you buy something for your business and charge it to your personal account, then a lender will have a skewed perception of your liabilities. Remember, they need an accurate portrayal of your finances if they are to approve you for a loan.
Keep An Eye On Deductions
Remember that any expenses you write off for your business that will benefit you on your taxes may not work in your favor when applying for a mortgage. Why? Because lenders look at your total income as the amount you earned after deductions, not your gross income. Talk with your trusted financial advisor about how reducing your tax deductions will affect you.
Get A Co-Applicant
While not always necessary, depending on your unique circumstance, co-applying with someone with a stable income like a spouse can help you get a mortgage. Especially if they have a consistent income documented via W-2s. Ask yourself if this person will be a co-borrower or a co-signer, as each has different responsibilities when it comes to financial responsibility.
A Good Down Payment Is Always A Plus
Saving up enough money to put down a large down payment on the home you wish you purchase can potentially make you more attractive as a borrower, as you will be paying for most of the home up-front. In fact, the higher your down payment, the lower your interest rate and monthly payments will be, and the less you will borrow.
However, before you make a hefty down payment make sure that you can afford it and will be able to pay off your other debts in the meantime.