What to Know About Getting a Mortgage When Self Employed
Many people own their own businesses instead of working for someone else. However, most small business owners often need to use home loans just like everyone else. Being self-employed can make it more difficult to get a mortgage because it doesn’t always guarantee a steady stream of income. While getting a mortgage can be more difficult while self-employed, it isn’t impossible. Here is what to know about getting a mortgage while self employed.
Stated Income/Stated Asset Mortgages
Self-employed home buyers have a few different options they can look into, the first of which is the stated income/stated asset mortgage (SISA), also known sometimes as low-documentation loans. These loans require the applicant to state their income. The lender may want to verify the sources of income, so the applicant needs to have proof of where their money is coming from. Some lenders may also require the applicant to fill out an IRS Form 4506 or 8821 to help the lender determine if the applicant-submitted information is accurate.
No Documentation Loans
When a buyer applies for a no documentation loan (also known as just a no doc loan), the lender won’t do any research on their own to verify if the information is true or not. While this option poses a higher risk for the lender, it can be a good option for a business owner whose tax returns show a low profit. However, because of that risk, buyers who choose to use a no doc loan can expect to see much higher interest rates than they would if using a fully documented loan.
How to Improve Chances of Being Approved for a Mortgage
While lenders many not go into applicants’ financial histories for SISA and no doc loans, this doesn’t mean it’s easy to get one of these loans. Lenders tend to be cautious when dealing with these applications because they can potentially lose a lot of money. However, home buyers can improve their chances of having their application accepted. Here are some of the ways to do it.
- Have a large down payment: When purchasing a loan, buyers are expected to have a 20% down payment. However, home buyers can provide more than that to show lenders they’re serious about the loan
- Improve credit score: The higher someone’s credit score, the more appealing they seem to lenders. Buyers should be doing everything they can to improve their credit score before applying for a loan
- Pay off debts: Many people have other loans out for various things such as auto loans for a new car or student loans for higher education. Buyers should try to pay off their other loans before applying for a home loan to give themselves credibility in the eyes of lenders
These are just a few of the different things home buyers should try to do before applying for a mortgage. A few other things to do include building cash reserves and providing official documents that show proof of income.
Getting approved for a mortgage while self employed can be tricky, but by knowing what to do ahead of time, buyers can improve their chances of getting approved. No matter which type of loan a Saint Louis County home buyer chooses to use, they can have a hand in helping get approval.