Self Employed Mortgage –How to Secure Financing For Your Home
Securing a mortgage can be difficult if you are self employed particularly in light of the unregulated lending practices that have gone on in recent years. This article will help you get financing for your home and help you avoid any costly pitfalls.
How Your Lender Sees You
Being self employed means that borrowing money for your home can be much less straightforward than if you were receiving a steady pay check from your company. The Banks and other lending institutions have different requirements for self employed people because they are looking for more assurances that you will pay them back. This is also the case with loans for the unemployed. Typically the choices for a mortgage are somewhat limited owing to the fact that you do not have a steady or stable income and your own credit rating may not truly reflect your financial situation.
The lender will use the information that they have on hand about your business and this works against most self employed people because the lender will look at your taxable income. Most business will have an accountant go through and list as many tax deductable business expenses as possible. While this saves you money on your taxes it has the adverse effect on your mortgage application. Your lender might question your ability to afford a loan off your seemingly small taxable income when this may not be the case at all. So be prepared to see slightly higher interest rates and lower approved loan amounts.
Types of Self Employed Mortgages
While it has become more difficult for a self employed person to get a mortgage after the sub prime mortgage collapse, lenders are still available that will offer you one of the following loans;
SISA - Stated Income Stated Asset Mortgages
Also known as low documentation loans these mortgages are based on what you declare your income to be. Although the amount of money that you earn will not be verified directly the lender may choose to confirm where your income is coming from. In the case of self employed people this would mean providing the lender with a list of your investments and recent clients that you have worked with for example.
Due to policy changes bought in after the subprime mortgage crisis to guard against unregulated lending, The lender may request further documents from the taxation office themselves including previous tax returns and also permission for them to request other documents from the taxation office themselves. To successfully qualify for this type of mortgage, self employed borrowers need to provide the lender with the following information;
- 2 Years of Business Tax Returns – These should be 2 full financial years hence if you started your business in the middle of the financial year that tax return may not be counted.
- 2 Years of Personal Tax Returns – This is used to verify other sources of income such as investments.
- Confirmation of Self Employment – This generally takes the form of a letter from your CPA to further confirm the above.
- A Profit Loss Statement – This is taken for the year to date just to make sure that you and your business are still on track.
If there is a problem with any of this information then the lender will either turn your application down or request additional documents providing more details about your finances. The underwriter will use the information that you provide and take your average net income to help determine the loan amount. This can be a negative you if have had one bad year that brings your average down significantly. If this is the case then you may want to opt for a no documentation loan.
No Documentation Loans
These Loans are so named because you will not need to declare your income at all. Though these are viewed as riskier for the banks and lenders it may be a good option of you have suffered significant losses on paper or a very minimal profit in the last taxation year. As these documents will inevitably hinder a conventional loan application the no documentation loans provide a good alternative at the expense of a higher interest rate and reduced borrowing terms.
The only thing that you need to document to your borrower is a good credit rating. For these loans you do not even need to be employed or own a business. Having enough money for the down payment and the funds to cover any closing costs are often enough for you to secure financing. Of course the interest is going to be much higher and some lenders will also have some regulations as to how much they are willing to lend in relation to where the house is. Because you are not required to verify your income the lender will want to ensure that you are buying a solid asset which in the event that you default on your loan can be sold off with enough value to cover their expenses. As such the property itself will be appraised before the loan is approved.
Tips For Getting A Mortgage
Bearing in mind the criteria of the underwriters there are a number of things that you can do to make yourself a more appealing prospect to the lenders and help you get your mortgage. The tips below will put you at the top of the list for approval from your lender and also ensure that you are ready for what happens after your application is successful.
Make A Large Down Payment
If you put in a larger down payment the bank will have to lend you less money. Because of this you are seen as not only lowering the risk of the lender but also as being more committed to your property and willing to pay off the loan to secure the equity in your home.
Improve your Credit Rating
You should do whatever you can to up your credit rating as this will help not only with the mortgage but any other type of loan that you wish to secure. People with higher credit scores will have a proven track record of repayments and as a result generally are eligible for lower interest rates.
Pay off Bad Debt
This is linked to the point above and the usual culprit for this is your credit cards and car loans. By paying off these debts completely you are telling the bank that you have more cash available after your living expenses to pay down the mortgage. In addition because you have better cash flow the bank may increase the borrowed amount.
Have an Emergency Fund
Having liquid cash reserves is further proof that you are a qualified borrower. The lender will see this as proof that you have planned for unexpected expenses and are prepared to continue making payments should you lose a contract or get injured etc. A good emergency fund should be enough for you to go 6 months without work and having to drastically reduce your expenditure. Regardless of your situation everyone should have an emergency fund.
Document Your Self Employment
Being able to show that you can successfully operate a business is a big part of securing your financing. As mentioned above, records for 2 years are a good indicator because most small business will have failed well before that mark and again before 5 years. If you can demonstrate that you are making enough money to support your mortgage and continue to do so then you should be well on your way. Records of other business contingencies like having self employed public liability insurance can make it easier to secure financing as this demonstrates that you are a responsible business owner. You can make your claims even stronger by providing evidence of future contracts with prospective clients including and cost and time projections.
Look Online…Then Pick Up The Phone.
The internet is a great way to compare mortgage rates and do your research. It’s a great way to start the process because you can quickly get a quote and play around with your figures using the many mortgage calculators available. After you have done this it is still best to pick up the phone and call the lender. There are cases of people who have applied online only to be rejected several times and have that information made available on their credit history.
By calling the company and applying for your loan over the phone or in person you will more likely be approved because the lender can assess your application in more detail and you won’t be subject to a computer formula that can’t take many things into account when deciding to approve you for financing. So start online and narrow down the lenders from there. If you follow the above tips then it’s only a matter of time before you have your mortgage approved, and at a favorable rate.