Being self-employed certainly has some great advantages, like not having a boss or setting your own work hours. But not being an employee also has its disadvantages, such as not having paid sick days or paid vacations. The biggest downside, though, is that buying a home is a bit more difficult. With all of the strict requirements, becoming a home owner is tough even for people with steady jobs. Not having a full-time job, a regular income and an employer’s tax form can make it even more difficult for a self-employed worker to get a mortgage loan.
However, it is not impossible. Buying a home when you are self-employed will require more documents than getting a mortgage as a full-time regular employee, and it will probably take longer, but it is doable. Most lenders will probably be worried that you won’t be able to make enough money to pay your mortgage, while others will simply not want to deal with the hassle of giving a mortgage loan to a self-employed home buyer.
Expectations When Shopping for a Mortgage
Most lenders will regard you as a high risk borrower, so you will probably have to pay a higher interest rate than someone who works for a company or an institution. Interest rates advertised by borrowers are really low, but they are normally reserved for home buyers with perfect credit scores and perfect financial situations. The rates that you, as a self-employed worker, will get will probably be much higher than the interest rates that are advertised.
Because you are not looked at as the ideal borrower, you will most likely have to shop around more until you will be able to find a lender who is willing to work with you. Also, your ability to negotiate a lower interest rate will most likely be very limited. Based on your loan-to-value ratio, you will probably have to come up with a larger down payment, as well.
Mortgage Loan Options
Lenders try to stay away from giving out risky loans in order to protect themselves, but there are a few types of mortgage loans that lenders may be willing to give to self-employed workers. One of these loans is the Stated Income/Stated Asset Mortgage loan, which is based on the amount that you declare is your income. The bank will not verify this amount, but you will be required to provide a large amount of documentation, from a list of your clients, to several IRS forms.
Another loan that lenders might give you is the No Documentation Loan, which is great for self-employed workers with low profit, or even those who don’t make any profit at all. However, you will have to pay a much higher interest rate, and probably make a larger down payment.
However, if you are able to provide your lender with enough documentation that proves your income, you can qualify for a regular mortgage loan, which has lower interest rates, and a lower down payment requirement. Traditional employees receive a W-2 form, which reports his or her income, but a self-employed person will have to provide other types of documents, such as tax returns, a business license, balance sheets or profit and loss statements.
Make Yourself Less of a Risk
If you are sure that you can afford a mortgage, and would like to encounter as less difficulty as possible when applying for a loan, you should start by making yourself less of a risk in the eyes of a lender. You should start by improving your credit score as much as possible. Besides making you qualify much easier for a mortgage loan, a perfect credit score will ensure that you receive a much better interest rate on your mortgage.
By making a larger than usual down payment, your lender will regard you as less of a risk. Also, having savings will look good in the eyes of a lender, as you will be less likely to abandon the mortgage if your business stops making a profit.
Lenders may regard you as a higher risk if you are self-employed, but the truth is that a person who is working a full job can be an even higher risk than a self-employed worker. A traditional employee loses all of his or her income when fired, while a self-employed worker probably has several clients, and the chances of losing all of them at the same time are slim. If your business is doing well and you can prove to your lender that you can make monthly payments on your mortgage, then there shouldn’t be any issues getting a mortgage loan if you are self-employed.