You might have successfully eluded the impact of the economic recession by becoming your own boss – self-employed! You probably think this is the right time to have your mortgage refinanced or make purchase of a new house or an office. Though you may have good credit history and sufficient assets; yet there is more to securing what you need from mortgage lenders. You would need to submit to the lenders your tax returns and likely a quarterly profit-and-loss statement. This is to ascertain that you truly have the means to making your mortgage payments.
As a self-employed, you would need more than just a quick comparison of the best mortgage rates around to find the best mortgage for you. For those who are newly self-employed, a minimum of two years record of tax returns is required before your self-employment income could be included in your loan application for a new mortgage. If you’re already self employed and looking forward to qualifying for a mortgage, you wouldn’t want to miss out on the following steps:
There are a lot of self-employed who, for tax purposes, would have their income reduced through the deduction of business expenses. It, however, happens that it is the very income stated on your tax returns that is considered for a mortgage loan. This means that manipulating your income to a smaller value would only make you qualify for a smaller mortgage amount. The income is calculated as the average of two or sometimes three most recent tax returns. Apart from this, lenders would require a quarterly profit-and- loss statement. According to the FHA, there are new rules which require the borrowers to have their ongoing income proven in the form of a year-to-date profit-and-loss statement if it happens that more than a quarter has passed since the last tax return was filed.
While credit scores of about 640 or above are required to qualify for a loan with Federal Housing Administration (FHA), having credit scores of 740 or higher are required order to qualify for the best mortgage rates in the market. There are lenders who view self-employment income as one with higher risk than that associated with the salaried class who are having regular paychecks. Due to this, a higher score is needed to offset the risk factors that surround self-employment income.
The level of assets owned by the person who wishes to take a mortgage also plays a major part in his appraisal by lending agencies to determine if they can lend to him. The agencies tend to lend to people who are having a higher level of assets with a lower interest rate than a person who is having a lower level of assets. Home equity is the prominent factor which is considered while appraising a person for his loan. Home equity refers to the relationship between the property’s market value and the total value of all borrowings and liens on the property.
Various lenders operate with different rules in respect of how much one needs to have in cash reserves. Different mortgage products also call for different sets of rules. However, a general requirement is that you need to have at least two months of housing payments in the bank so as to secure for yourself protection during an emergency. If you happen to be a self-employed borrower, whose income tends to fluctuate more than happens in the case of regular employees, be reminded that lenders would need to about your capability to handle your finances in both the seasons.
A debt-to-income or DTI refers to the percentage of his/her income which a person pays towards debts. Generally lenders require those who which to procure a mortgage loan to have debt-to-income ratio of below 41%. Nonetheless, with a ratio as high as 45%, borrowers may qualify for a mortgage given that they are able to provide other comforts to the lender. With a mortgage calculator, borrowers can have their housing costs along with other debt estimated. A comforting factor that can be to borrowers’ advantage prior to qualifying for a loan would be to pay off some bills to have their debt-to-income ratio reduced and also close loans which have low principle outstanding to have a reduced outflow of income towards repayment of debt.
Qualifying for a mortgage as a self-employed shouldn’t be a headache if you have solid income, good credit, assets, and have accurate documentation required by your lender.