Generally speaking, it is more difficult for self-employed entrepreneurs how to qualify for a mortgage than employed people. That is because your income is more complicated. It is not as easy to verify your income and it can fluctuate greatly one month from the next and year on year. You may have to also prove that your business is stable. Typically, mortgage lenders perceive self-employed people as a higher risk, so the criteria for assets and credit can be more stringent for entrepreneurs. You may need to have a stronger overall financial profile to offset the higher risk that a mortgage lender perceives.
While it may be more challenging to qualify for a mortgage as an entrepreneur, many self-employed people do indeed manage to qualify. Here is a look at the steps you can take to hopefully ensure you are accepted for a mortgage as an entrepreneur.
Compare Different Mortgage Lenders
Most self-employed entrepreneurs will have to wait at least two years from the time they launch their businesses before applying for a mortgage. But regardless of when you apply, it is crucial that you look into various mortgage lenders and their different rates. That way, you could discover lenders that offer more flexibility to the self-employed. You can compare current mortgage rates here to get started on your quest to find the right lender for your individual circumstances.
Provide Proof of Employment
To qualify for a mortgage, you will need to verify your employment. That is easily done when you are an employed worker. Proof of employment can be obtained by the lender with a simple phone call to your employer and documentation provided by the company’s human resources.
If you are self-employed, it is more difficult to verify your employment status. The good news is there are several documents that you can submit to prove your employment. Whichever paperwork you provide, make sure it proves that you are self-employed for two years or more. That allows your mortgage lender to know that your entrepreneurial business is stable. Here are some of the documents you can provide your lender with to prove your employment:
- A letter from a licensed accountant or tax company.
- The letter from a client who has used your product or service.
- A letter of membership from a professional organization.
- A current statement of your bond insurance.
- A business license, if you work in a regulated industry.
Provide Proof of Income
You not only need to prove the existence of your business. You also need to prove your income. Again, it is easy for employed people to do that with payslips or documents provided by the employer, but it is not so easy for self-employed entrepreneurs. Providing proof of income is a crucial step in obtaining a mortgage, though. So, if you want your application to be accepted, it is vital you provide the right documents to verify your income. Lenders will want to see a steady record of income for at least the last two years. Other forms of income documentation might suffice, and you should always check with your lender as to which documents they accept, but you should be able to pass the application stage as long as you can provide one of the following documents:
- Business tax returns.
- Personal tax returns.
Make sure the information shows income that is taxable with the IRS. Documents that show gross revenue alone are not usually acceptable. The keys to making sure you have all of the income information required to qualify for a mortgage are: keeping accurate records, managing your cash flow, and ensuring you get paid on time.
Other Tips for Qualifying
In addition to comparing insurance companies, looking for ones that offer flexible plans, and ensuring you have all the necessary paperwork to verify your employment and income, there are other ways you can increase your chances of being accepted for a mortgage. Here are some top tips according to experts:
- Run a credit report to determine your creditworthiness.
- Review your debt-to-income ratio and lower your debts where you can.
- Save at least 5% to 10% for a down payment.
- Ensure you have three times your anticipated monthly mortgage payments in savings once the down payment has been paid.
- Have liquid money available to cover ongoing expenses.