Requirements to Purchase a Home Have Never Been So Stringent, Especially for the Self-Employed.

self-employedSelf-employed individuals need to be more responsible than they ever have been if they want to purchase a home.  People are self-employed for the freeing benefit of not having to answer to a boss, to manage your own day-to-day operations.  There is no one to micro-manage you, no one to tell you when you have to be in and out of work, no one to cap your pay, and you can choose your own employees.  Overall, it creates the work environment that many people dream of, but when it comes to purchasing a home this dream can very easily turn into a nightmare without the right supporting documents.

Your Ability-to-Repay: Firstly, we will discuss Ability-To-Repay (ATR).  Banks may question an individual’s ATR when the individual exhibits income fluctuations and irregular paycheck schedules.  It may slow down the process when the bank wants the borrower to prove income over a longer period of time in order for the bank to determine that the borrower does in fact have the ability to repay the loan.  The fact that banks have become more speculative alone exhibits why carrying a paper trail of money transactions is essential for the self-employed when looking for a mortgage loan.  It allows both the bank reviewing the individual as well as the individual hard proof as to what their financial outlook is, so that there are not as many obstacles in the process of obtaining a home loan.  Also, a healthy savings account with at least two-three months of mortgage payments would not hurt at all when the bank is reviewing an individual’s financial portfolio.  The bank also wants to see that you are prepared in case business slows down.

Your Credit Score: This next topic goes for everyone, not just the self-employed.  Work for the highest credit score that you can possibly have.  At Broadview Mortgage, the lowest possible credit score of borrowers whom we lend to is a 640 FICO score.  However, as a self-employed borrower, I would strongly advise to aim for a credit score much higher than 640.  The high 700-800 range for a credit score is strongly advised for everyone, but bears more weight in a self-employed candidate.  Why is this so important?  A high credit score highlights the fact that an individual is less likely to default on a debt payment.  It shows that the individual pays bills on time, and it is valued based on an individual’s debt-to-income ratio, demonstrating how much debt this person has versus how much money that they make (to pay it off) on a regular basis.  Always check your credit report for mistakes, and dispute them.  Chances are the credit reporting agency has no records of the mistake, and they will likely take it off.  But, that doesn’t go without the individual having to put up a fight.   Typically credit-reporting agencies will make you jump through hoops and be unresponsive so that you give up.  Don’t give up.  Due to the Fair Credit Reporting Act, no credit-reporting agency is allowed to post negative items to your credit report without supporting documents to prove that this is true.

Your Debt: Pay down your debt.  This is something that will stand out to banks as well as improve your credit score.  Credit cards maxed out to the limit and multiple loans do not help your cause, and it does not improve the bank’s impression of you.  In order to be eligible for a mortgage loan in the first place, your debt-to-income ratio should be no larger than 43%.  The way to combat this is to pay down debt as much as possible.  Credit cards, car loan, student loans, and any loans under your name factor into how much debt you have.  When you are paying down your debt, consider paying down the debt with the highest interest rate first, and eventually work your way down until all accounts are paid off.

Required Paperwork: Banks will require a copy of your tax returns over the past two years, and also a copy of your company’s Profit-and-Loss Statement.   Also, if your income from being self-employed has fluctuated, the bank will take an average of the two.

Tax Write-Offs: Consider whether you would like to purchase a home before tax season if you are self-employed.  The reason being, if you plan to write-off a bunch of business expenses, it might lower the amount that you owe to the IRS, but it also lowers your net-income.  Writing off business expenses makes it seem as though you earned less.

The moral of this story is to keep a paper trail of everything you do when you are self-employed.  It will surely expedite the process of obtaining a home loan, and will save you a lot of headaches.

If you have any questions about the information herein, feel free to reach out to the Author, Brittany Williams, at Brittany.williams@broadviewmortgage.com.  If you would like a quick preapproval Click Here, and for assistance with down payment or buyer assistance Click Here.  You are also always free to give us a call Toll Free (855) 692-7623.

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