5 Steps To Qualify For A Mortgage If You’re Self-Employed
We often get phone calls from people that are self employed with concerns about qualifying for a home mortgage. These are valid concerns since there are usually stricter guidelines to qualify for the self employed professionals.
The following article is a useful guide to help you determine what you will need to qualify for a home loan or mortgage refinance if you happen to be self employed.
If you are among the thousands of Americans who turned the dark cloud of the recession into the silver lining of becoming self-employed, you may feel you are now in a position to refinance your mortgage or to buy a home. Even with good credit and sufficient assets, though, you’ll find that even the best mortgage lenders will require you to produce your tax returns and possibly a quarterly profit-and-loss statement in order to establish that you have sufficient income to make your mortgage payments.
SEE: 6 Questions To Ask Before You Refinance
Most mortgage applicants today are prepared to go through a few hoops to qualify for a mortgage, but if you’re self-employed you may need more than a quick comparison of the best mortgage rates to find the best mortgage for you. If you’re new to self-employment, you will need to wait until you have two years of tax returns filed before you can be approved for a new mortgage in order to include your self-employment income in your loan application.
All borrowers today need good credit, with a score of 620, 640 or above for a Federal Housing Administration (FHA) loan and a score of 740 or higher to be offered the best mortgage rates for a conventional loan. Some lenders consider self-employment income as a higher risk than regular paychecks, so a higher credit score can offset your potential risk factors and give a lender greater confidence when qualifying you for a loan. Check your credit report to see if you have negative information that can be corrected or improved before you apply. (For more tips, see Self Employed? 5 Steps To Scoring A Mortgage.)
Low Debt-to-Income Ratio
Lenders typically like to see an overall debt-to-income ratio of 41% or less, although borrowers with other compensating factors may still qualify for a mortgage with a ratio as high as 45%. You can use a mortgage calculator to estimate your housing costs along with your other debt. If you can pay off some bills to reduce your debt-to-income ratio that can be another compensating factor in your favor.
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