Self-employed and ready to buy a home? If you’re one of the many who are freelancing these days and have joined the ranks of the self-employed, you’ll be glad to hear that it’s not only possible to get a home loan with Resource Financial, it’s hassle-free.
For lenders, it all comes down to risk. Even if your average income is satisfactory, if your income fluctuates month to month, some lenders may shy away. Not all lenders are alike, so don’t be discouraged. There are many steps you can take to put yourself in a great position to buy a home. Resource Financial is happy to help self-employed borrowers buy a home and make sure things work in your favor with these tips to help get your loan approved.
Tip #1 Have Your Paperwork in Order
When it comes to documentation, freelancing is different from a full-time job. In a traditional office job, your company takes care of the pay slips, tax returns and more. When you are self-employed it’s up to you to ensure your accounts are up to date and are prepared by a professional accountant.
Before you apply for a home loan, be prepared with these documents, required by Resource Financial for a self-employed borrower:
- Last two years of tax returns
- A year-to-date profit and loss statement
- A copy of three months bank statements ending the same time-period as the profit & loss statement
Tip #2 Boost Your Credit Profile
Lenders evaluate your credit profile; it serves as a simple evaluation tool when making a lending decision. Having the best possible credit score shows your ability to repay a loan. You can clean up your score by fixing small errors in your credit history such as an incorrect address, name, or phone number. Don’t open new lines of credit when preparing to apply for a home loan, as anytime an inquiry is made on the credit report, your score takes a hit.
As far as the number goes, most lenders are looking for a score of at least 620. Higher is better and borrowers with scores of 740 or more will get the lowest interest rates.
Tip #3 Freelance for 2 Years Before Applying
Being self-employed is essentially like owning your own business. Since you are the one controlling your work and income, you will need to prove that you’ve got some work history under your belt. If you have two to three years work experience, your lender can see that you can sustain an income throughout the year and can afford the monthly payments.
Tip #4 Lower Your Debt-to-Income Ratio
DTI is your debt (monthly payments) divided by your monthly income. Lenders look at this number to see if it’s possible to repay what you have borrowed. Having a low number is better, but most lenders will allow a DTI of 43%.
Having a higher DTI means your debt takes up most of your income, which heightens the risk of defaulting on the loan. If your ratio is too high, try to pay off your high interest debt, lower your monthly payments on a debt by asking for a lower interest rate on a current loan and definitely control your non-essential spending.
Tip #5 Make A Larger Down Payment
Start saving towards your down payment. A down payment higher than 20% demonstrates how serious you are about buying a home and will make it easier to qualify, since you’ll be financing a smaller portion. It also makes your monthly payments lower.
If you are self-employed and in the process of purchasing your first home, be sure to reach out to one of our Mortgage Bankers who will answer any questions you may have and will guide you on your home buying journey.