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5 Mortgage Application Tips for the Self-Employed

Jul 7 2020

As your own boss, you’ll want to put your business in the best light possible. As a homebuyer, this will help you get the best possible interest rate for your mortgage. Here are some tips to help make that happen:  

Tip 1: Set your biz up correctly 

The most important thing is to set up your business correctly. You’ll want the proper licensing and incorporation papers, and to keep your business records (including your spending and tax filings) separate from your personal ones.  

Tip 2: Monitor your credit 

Lenders view your credit score as an indication of how well you handle your debt obligations. The higher your credit score, the more favorable position you may be in when applying for a mortgage. 

Another factor that affects your credit score is credit utilization. This is the ratio of how much credit you’re using compared to your total available credit.

For example, if you have a credit card with a limit of $10,000, and you owe a $6,000 balance on it, your ratio is 0.60, or 60%. The lower your credit utilization ratio, the better it is for your credit score, which means it’s better for your mortgage application.

A good rule of thumb is to keep credit utilization under 30%. 

Tip 3: Keep your DTI low 

Your debt-to-income ratio, or DTI, is the percentage of your gross monthly income that goes toward paying your monthly debts. 

In a lender’s eye, the lower your DTI, the more of your monthly budget is available to make your mortgage payment. What does this mean for you? For one thing, having a lower DTI can help you get a better interest rate. 

To calculate your DTI, divide your total recurring monthly debt payments by your monthly income before taxes.  

Experts recommend having a DTI of less than 43%. If your DTI is more than 50% and you’re hoping to qualify for a mortgage, it may help to first focus on reducing your debt before applying.  

Note: Fluctuating bills such as utilities and groceries aren’t considered debts and aren’t taken into consideration when calculating your DTI. 

Tip 4: Save as much as you can 

 Try to come up with as much money for a down payment as you can, as it provides assurance to lenders that you can financially afford to buy a home. 

 However, most lenders also want to see that you have an emergency fund to get through months when you’re not earning as much. Most look for three months’ worth of mortgage payments to be in your account. 

Need some help? The Small Business Administration provides tips to set up your business, along with small business resources in your community. 

Tip 5: Consider a co-borrower or co-signer 

You can jointly apply for a mortgage with another person, whether they choose to live with you or not. It’s called having a co-borrower or co-signer, and it can go a long way with helping you get your mortgage application approved. 

A co-borrower, sometimes called a joint applicant, borrows the money with you and shares equal responsibility in repaying the loan. A co-signer is like a guarantor in that they promise to repay the loan if you can’t.  

If you want to go this route, ask your lender if they have any restrictions or added costs associated with having a co-borrower or co-signer. 

The bottom line is that it’s totally possible for self-employed workers to take out mortgages, and covering all your bases in advance can be a huge help during the application process.

 

 

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