Working for yourself can be rewarding. Except, maybe, when it comes to getting a home loan.
Financial institutions are more cautious with the self-employed than with predictable W-2 wage earners. This means more paperwork and challenges. But some planning can smooth your path, including the following expert advice and tips.
- If you hold 25% or more ownership interest in a company, it’s profit/loss will count against your net income for home-loan qualification. Even if you’ve got a secondary source of W-2 income, tell your mortgage funding company about this ownership holding. Underwriters are good at finding out, so don’t risk hiding it.
- Bad credit can hurt you, even if business is good. And unfortunately, strategies that may make sense for your business, like lots of short-term borrowing with credit cards, can negatively impact your credit scores—even if you pay your balance on time. Fix credit report problems, pay down debt and consolidate high-interest credit card debt with, for example, a low-rate Credit Union credit card.
- Patchy income is a warning sign. Ideally, lenders want to see stable or improved income over time with two-plus years of self-employment income in the same industry. Also note: a decline in one year of 25% or more can be a red flag. Saving for emergencies with a “rainy day” fund can give the lender more confidence that you can pay your loan even during lean times — for example by investing in industry-leading Certificates from the Credit Union.
- Debt-to-income is a key metric lenders consider, with a maximum of 50% often cited. With this in mind, if you have decent credit and income, the down-payment requirements should be no different for the self-employed than for other classes of borrowers. If you are concerned about getting enough money for the down-payment, see if your state has bond programs that provide down-payment assistance.
- Keep business and personal income, assets and expenses separate. For example, it might be convenient to charge a work item to your personal credit card, but this can complicate how a lender views your liabilities.
“Lenders who understand your business model can give you more latitude.”
And some more good advice. Lenders who understand your business model can give you more latitude and may even offer preferential mortgage products geared to agents like your Credit Union does. Farmers Insurance Federal Credit Union has its own mortgage company and a team that will hold your hand throughout the process. Learn more here.