One of the most common elements that traditional mortgage lenders look for in a candidate is stable income and a history of reliable employment. This begs the question: what if I’m self-employed? Being self-employed presents an interesting hurdle. Chances are lenders are unfamiliar with your business, how profitable it might be, and may require a more intense income verification process.
Self-employed people are able to apply for the same loans as anybody else and will have to fill out all the same paperwork/applications that other people do, but may experience some resistance when it comes to proving income and employment history.
Typical Mortgage Requirements
Although mortgage requirements vary from institution to institution, there are some general commonalities. Some of these through lines include:
- A 3% or higher down payment
- Minimum credit score of 620
- Debt-to-income (DTI) ratio of 45% (some may allow higher DTIs if the borrower can prove stable income, large amounts of savings, or other circumstances)
Essentially, lending institutions want concrete evidence that you are reliable when it comes to paying your bills on time and in full, that you have stable income, and no significant debt that may interfere with your ability to pay back the loan.
Difficulties of Being a Self-Employed Borrower
Some of the above mortgage requirements can be difficult for self-employed people to meet on paper. Self-employed borrowers have to show 2 years of tax returns that prove solid, stable income in order to qualify for a home refinance or mortgage. Though some lenders make exceptions. If, for example, you’ve only been self-employed for 1 year, but have worked in the same or similar line of work for multiple years before that, you may be able to procure a loan.
One of the most prevalent hurdles self-employed borrowers face is proving their income. Oftentimes, business owners write off a lot of expenses instead of taking an official salary in order to avoid paying income taxes — an interesting strategy in the short-term, but something that can present difficulties when it comes to taking out a loan. This is because the self-employed person takes a small salary on paper and therefore may not have enough provable income to qualify for a mortgage.
When searching for a mortgage, keep in mind that lenders want to see the following qualities:
- Wage stability
- Strength and long-term viability of your business
- The nature of your business
- Business and personal credit history
Alternative to Mortgages for Self-Employed Borrowers
If you’re searching for a mortgage for self-employed borrowers and getting denied, particularly due to bad credit, there are other options. For instance, SKYDAN Equity Partners offers a home sale/leaseback program that allows you to access your home’s equity without having to sell or leave it. This allows you to pay for any life expenses, thereby improving your credit, bulking up your cash reserves, and getting a boost to qualify for that sought-after mortgage.
Here’s how it works:
We buy your home and in return give you a large sum of cash, with which you pay off existing debts (property taxes, credit card debt, medical bills, etc.). You then lease the home back from us for up to 24 months with deferred rent payments. This means that while you’re leasing your home back from us, there are no monthly payments, no interest paid, and no added debt.
At the end of the 24-month period, you have two options:
- Purchase the home back (original price + deferred rent)
OR
2. Sell the property, keeping all additional equity
We don’t care about your credit score, employment history or debt-to-income ratio. We are here to help you improve your finances, not add to your debts. The only thing you need in order to qualify for our program is to have enough equity in your home. If you need to tap into your home’s equity to help pay for life expenses, give us a call today for a consultation.