Mortgage Tips for the Self-Employed

Navigating the mortgage process can be tricky for anyone, but for self-employed individuals, it often feels like there are extra hoops to jump through. Lenders tend to see self-employment as risky due to inconsistent income streams, even if you’re earning more than traditional employees. Fortunately, with the proper preparation, you can make the process much smoother and increase your chances of approval.

This guide provides essential tips for self-employed individuals who want to secure a mortgage. You’ll learn how to organize your finances, improve your credit score, save for a down payment, and understand what lenders are looking for.

1. Organize Your Financial Documents

One of the most critical steps in the mortgage process is proving your income. Unlike salaried employees who can provide pay stubs, self-employed individuals need to take additional steps to demonstrate financial stability. Here’s what you need to prepare:

A. Tax Returns (Typically Two Years’ Worth)

Lenders usually require at least two years of personal and business tax returns. Make sure these documents are accurate and up-to-date. If your income fluctuates yearly, lenders will likely assess your average annual income over this period.

B. Profit and Loss Statements

Provide a detailed profit-and-loss statement for your business. This shows lenders your revenues, expenses, and overall net income. Consider hiring a certified accountant to prepare this to ensure accuracy and professionalism.

C. Bank Statements

Lenders often request both personal and business bank statements to verify your cash flow. Be ready to provide three to six months of recent statements.

D. Additional Documents

Prepare other supporting documents, like a list of assets, debts, and any contracts that demonstrate long-term income potential. Being thorough boosts your credibility with lenders.

Pro Tip: Keep all financial documents organized and readily accessible to avoid delays when you apply for a mortgage.

2. Improve Your Credit Score

Your credit score plays a significant role in determining your mortgage approval and the interest rate you’ll receive. A higher score can save you thousands over the life of your loan. Here are some strategies to boost your credit:

A. Check Your Credit Report

Start by obtaining a free credit report from one of the major bureaus (Experian, TransUnion, or Equifax). Review it for errors, such as incorrect balances or outdated accounts, and dispute any inaccuracies.

B. Pay Down Debt

High credit utilization—your debt relative to your credit limit—can hurt your score. Aim to keep your utilization below 30%, and pay off high-interest debt when possible.

C. Make Payments on Time

Your payment history is a significant factor in your credit score. Set up reminders or automatic payments to ensure you never miss a due date.

D. Avoid New Credit

While preparing for a mortgage, avoid opening new credit accounts or taking on additional loans. Hard inquiries can temporarily lower your credit score.

Action Step: Start improving your credit at least six months before applying to give yourself time to see results.

3. Save for a Down Payment

For self-employed borrowers, a larger down payment can offset some of the perceived risk in the lender’s eyes. Here’s how you can build your savings:

A. Open a Dedicated Savings Account

Set up a separate savings account specifically for your down payment. A separate account helps eliminate the temptation to dip into these funds for other expenses.

B. Automate Savings

Treat saving for a down payment like a recurring bill. Automate transfers to your savings account every month to ensure consistent progress.

C. Cut Back on Non-Essential Spending

Review your budget to identify areas where you can reduce expenses. Skipping luxuries, such as eating out or vacations, can help your savings grow faster.

How Much Should You Save?

For conventional loans, aim to save at least 20% of the home’s purchase price to avoid private mortgage insurance (PMI). However, some programs, like FHA loans, may allow smaller down payments as low as 3.5%. Consult with your lender to find the right option for you.

4. Understand Lender Requirements

Self-employed individuals are subject to similar standards as traditional borrowers, but there are some unique considerations. Familiarize yourself with what lenders look for:

A. Debt-to-Income (DTI) Ratio

Your DTI ratio measures how much of your income goes toward debt payments. Most lenders prefer it to be 43% or lower. Calculate your DTI ahead of time and work on reducing debt if necessary.

B. Business Stability

Lenders typically assess the stability of your business. Operating for at least two years shows that you’re established and less of a financial risk.

C. Cash Reserves

Having a healthy amount of cash reserves demonstrates that you can handle unexpected expenses and make mortgage payments even if your income fluctuates. Aim to have three to six months’ worth of mortgage payments saved.

D. Lender Communication

Every lender has different requirements, so speak with several to understand their specific criteria for self-employed borrowers. Look for lenders experienced in working with self-employed clients, as they may offer more flexibility.

Pro Tip: Get a pre-approval letter before house-hunting. This shows sellers that you’re a serious buyer and gives you a clear understanding of your budget.

5. Consider Working with Professionals

Navigating the mortgage process can be overwhelming, especially when you’re self-employed. Enlist the help of experienced professionals to guide you:

• Mortgage Broker: A broker can connect you with lenders who specialize in self-employed mortgages and negotiate favorable terms on your behalf.
• Tax Professional: Accountants familiar with mortgage requirements can ensure your financial documents are in order.
• Real Estate Agent: A skilled agent can help you find homes within your budget and negotiate the best deal.

Final Thoughts

Getting a mortgage as a self-employed individual may take more preparation, but it’s entirely achievable with the right approach. Start by organizing your financial documents, improving your credit score, building your down payment savings, and understanding what lenders need. With these steps, you’ll be well on your way to buying your dream home.

Actionable Next Steps:  

• Begin gathering your financial documents today.  
• Obtain a free credit report and start addressing any issues.  
• Research lenders with experience in self-employed mortgages for tailored advice.

By taking these proactive measures, you’ll feel more confident and prepared to tackle the mortgage process head-on. When you are ready to start shopping for your next home, give me a call. I will help you get started in the right direction! Trent Beaver (928) 916-1921.