Getting a mortgage can be difficult for anyone hoping to buy property, whether business or personal, but being self-employed makes something already difficult even more of a challenge. While it can be hard to secure a mortgage when you work for yourself, it doesn’t have to be impossible. Some mortgage lenders will be less likely to approve your application than they would be if you were traditionally employed, but you can improve your chances by showing an organised approach to your finances. This can also help you to get a fairer mortgage rate too, which will save you money in the long-run.
Keep Your Tax Deductions To A Minimum
It might sound like the opposite of what would be good financial sense, but self-employed people should write off fewer expenses for at least two years before applying for a mortgage. Most self-employed people are advised to write off as much as they can on expenses to save them money and this is usually good sense. However, the opposite is actually true when you’re applying for a mortgage. This is because the mortgage lender, like Altrua Financial, will look at your income after your write-offs only. Tax filers who deduct a lot of expenses will show an income that appears to be lower than it actually is. When you’re applying for a mortgage, you should aim to show more money coming in to show that you can afford a mortgage and meet your repayments. You will have to pay a lot more in taxes for those couple of years, but you might have a much easier time getting the home of your dreams and the mortgage you need to pay for it if you do this. When you have your mortgage secured with a favourable rate, you can go back to writing off all your expenses like you did before and push your tax bill back down again to give you more money to spend on that new home you just bought.
Reduce Your Debt As Much As Possible
Many people get rejected for mortgages thanks to debt that they have from previous years, even old student debt. A high debt-to-income ratio is off-putting for any mortgage lender, as it makes you look like a higher risk choice, so drive down your debt as much as you can before applying. You could use your savings to pay off a big chunk of debt to push down that all important debt-to-income ratio. With this dealt with, you will have a much better shot at securing a mortgage and being able to buy a home.
This debt-to-income ratio is a big factor in how lenders decide whether or not to approve you for a loan and how much they will allow you to borrow from them. Even with a strong credit score, you should be careful to keep the ratio down, at least below 43 percent. With a low ratio, you can secure a better mortgage option and buy a home that you love.
Keep Detailed Records
With a salary, you would likely only need to show W-2 forms to prove your income, but this is more complicated for self-employed workers. A mortgage lender will want to see more evidence of your income in order to be sure that you can afford the mortgage repayments and won’t default, leaving them out of pocket. You will likely need to show a lot more documents to prove what you can earn, including two years of personal and business tax returns, profit and loss statements, bank statements and other paperwork. If you pay yourself a salary, you will need a traditional W-2 form from your business.
You should keep all these bits of paperwork, so you have them ready. It’s also wise to save your receipts and any independent contractor agreements, as these can also be used to support your application. Any documents that can show which showcase the amount of money you’re earning could be a big help.
Separate Your Personal Expenses From Your Business Ones
When lenders look at the amount of debt that you have, they will only at your personal debt, not at any debts that your business has. If you’re self-employed, then it is sensible to separate out your personal and business expenses.
You should have separate credit cards, checking accounts and saving accounts for personal and business use. Any business transactions should be properly expensed, whether you’ve bought a new desk or taken a client to lunch. Expense these costs back to the appropriate account. This will simplify your taxes and make it much easier to keep track of the money that you have going in and out of your business. Keep things separate also helps you to show a lender what you personally earn, not the money your business might owe.
Make A Larger Down Payment
Some borrowers find that being willing and able to make a larger down payment makes it easier for them to get a mortgage, and a better interest rate. A larger down payment reduces the amount that you need to borrow, which of course then decreases your risk of defaulting on the mortgage. Both of these factors look very favourable to a potential mortgage lender. The more you can put down, the stronger an option you will look to a lender.
Getting your finances in good order and having all your paperwork ready to show and confirm your earnings is important for anyone applying for a mortgage but it’s even more important if you’re self-employed. To a mortgage lender, someone who is self-employed can appear to be a bigger risk, so it’s very important to have all the evidence detailed and meticulously planned out to ease any concerns that they may have. Keep your finances in order, separate your business and personal finances, reduce your debt, save for a large down payment, reduce your tax deductions and keep any and all paperwork that may come in handy for convincing a lender to take a chance on you.
