5 Hard-Hitting Mortgage Strategies For Self-Employed Applicants

June 4, 2016 - 5 min read

Self-Employment Does Not Disqualify You From Mortgage Approval

If you’re self-employed, you probably work hard for your money.

You shouldn’t have to work harder to obtain a mortgage loan.

Yet, research shows that it can often be more challenging for an unprepared self-employed borrower to secure preferred home financing.

Self-employed borrowers are given 40 percent fewer purchase loan quotes than non-self-employed borrowers, based on a report by Zillow.

But these applicants report 81 percent higher household incomes and put down larger downpayments than their employee counterparts, per the same report.

If you work for yourself, there’s no reason to delay your homeownership goals.

Self-employed borrowers with their financials and paperwork in order can obtain enviable mortgage loans — and low 2016 mortgage rates — just like the non-self-employed.

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New Rules Make It Easier On Self-Employed Applicants

New rules from Fannie Mae prove it’s actually becoming easier for self-employed candidates to get approved for a mortgage.

Some conventional loan applicants need to provide only one year of tax returns, rather than the traditional two-year requirement.

To help matters, there are several steps you can take to greatly increase your odds of qualifying for favorable financing rates and offers.

Self-Employed Mortgage Applicants Overcome Low Credit Scores

Experts say a big reason why some self-employed mortgage candidates can have a tricky time landing the right loan is due to low credit scores.

The aforementioned Zillow study indicates that, among self-employed borrowers, 28 percent have self-reported credit scores below 680, versus 14 percent of non-self-employed applicants in this range.

“Most self-employed, even if they are highly successful, have sporadic income. This can create periods where they may have been stretching their credit to get through the lulls or where they are more likely to miss payments,” says Glenn S. Phillips, CEO of Lake Homes Realty in Birmingham, Ala.

“Because credit scores are indicators of consistent repayment of credit,” says Phillips, “the self-employed can be more likely to have inconsistencies that lower their scores.”

Credit scores can also decrease due to overuse of credit.

“Your credit score can take a hit downward if you carry a high balance-to-limit on your credit cards, even if you make all your payments on time,” says Carolyn Warren, senior loan officer with Bellevue-Wash.-based Envoy Mortgage.

For instance, if your credit card has a $10,000 limit and your current balance is $3,500, your ratio is 35 percent.

This is considered a bit too high. A balance of 10 percent or less is ideal. Other credit improvement strategies are as follows.

  • Wait until six months after mortgage application to open new credit lines
  • Avoid closing old credit accounts
  • If you miss a payment, try to make the payment before being 30 days late

With many loan programs, a low credit score won’t stop you from getting approved. FHA loans require a minimum score of just 580 to qualify for a 3.5% downpayment.

Conventional loans offered by Fannie Mae and Freddie Mac allow scores down to 620.

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One Lender’s Decision Is Not The Final Answer

Another challenge for the self-employed is verifying income. Non-self-employed borrowers receive a W-2 tax form from their employers that easily summarizes income and taxes.

Those in business for themselves, on the other hand, have to provide more paperwork to demonstrate employment and income, including personal and business tax returns.

A lender who doesn’t know how to properly parse through these documents may unfairly reject an application that meets guidelines.

If you do not receive an approval, ask the lender for their income analysis. Typically, underwriters keep a calculation sheet with which they determined your qualifying income.

Take that paperwork to another lender. See if they can spot mistakes or find missing income that could help you qualify.

You could be approved at one lender, when you were recently turned down at another.

5 Strategies For Self-Employed Mortgage Success

Self-employment never automatically disqualifies you for a mortgage. You need to meet the same basic guidelines as do applicants who work for someone else.

But implement these strategies to boost your chances of approval, and to get the best available rates.

1. Review your credit report

Correct any credit reporting errors you spot before applying for a loan. “If you have any collections, ask the collections agency to delete the record when you pay, not show it as ‘paid in full,’” says Holly Gustlin, senior loan officer with Calabasas, Calif.-headquartered Priority Financial Network.

2. Don’t write off too many tax deductions

Writing off too many expenses reduces your net income. This increases your debt-to-income ratio and makes it harder to qualify. “Avoid paying any ‘gray area’ personal expenses through your business. Sometimes doing this lowers your income below the level needed to qualify for a mortgage,” says Gustlin, who recommends consulting with a tax planner for more detailed strategies.

3. Strive for steady year-over-year income

Mortgage underwriters want to see a steady, predictable income flow from your business. If your most recent tax return shows lower income, offer to provide returns from three years ago, plus a profit and loss statement that details year-to-date earnings. This will provide a more accurate picture of income history.

Provide an explanation that the down year was a one-time occurrence.

4. Pool needed funds into one personal savings account

Move all the cash you need to cover the downpayment, closing costs, and cash reserve requirements into a single account that has minimum activity. “This minimizes the paperwork necessary when you are in the loan process,” adds Gustlin.

Once funds are in one account for 60 days, they are considered “seasoned,” meaning they are now considered personal assets. Taking funds out of a business account can require paperwork proving you have the ability to do so, and that it won’t affect the business.

5. Respond to lender requests

Gather all the needed documentation including at least the last two year’s worth of personal and business tax returns, the most recent year-to-date profit and loss statement, and recent bank statements.

“It’s also important to work with a mortgage lender who knows how to analyze your tax returns and design a strategy that will help you gain loan approval,” says Gustlin. “If you work with someone who is experienced and educated, you should be able to get a home loan as easily as a salaried employee.”

What Are Today’s Mortgage Rates?

Being your own boss doesn’t mean you have to settle for a less-than-favorable mortgage loan. You likely qualify for better rates than you think. Find out by obtaining an accurate, up-to-the-minute rate quote from an experienced mortgage lender.

Get today’s live mortgage rates now. Your social security number is not required to get started, and all quotes come with access to your live mortgage credit scores.

Time to make a move? Let us find the right mortgage for you

Erik J. Martin
Authored By: Erik J. Martin
The Mortgage Reports contributor
Erik J. Martin has written on real estate, business, tech and other topics for Reader's Digest, AARP The Magazine, and The Chicago Tribune.