Tips for Getting a Mortgage When You’re Self-Employed

One of the primary factors that lenders look at when they decide whether or not to approve a mortgage loan is your employment history and income—a factor that is typically validated by a paystub. But what happens when you are the boss? As a self-employed person who doesn’t get a typical paycheck, it can be hard to prove your income and creditworthiness to a potential lender. It’s not impossible to do, but it does require some extra effort.

The Income Conundrum

One of the benefits of being self-employed is the ability to write off business expenses to reduce your total taxable income. The problem is that lenders use tax returns to verify income when determining whether or not they think you could pay back a loan. A self-employed person can take advantage of many legal tax deductions related to running their own business, but then the income you report to the IRS each year is lower, and that is what a lender will see. The problem is that you don’t want to report any more income than you are legally required to according to IRS rules (because you will owe more in taxes), but your tax returns might not reflect your actual take-home pay that could qualify you for a bigger home loan, or qualify you for a loan at all.

Talk to a Mortgage Lender

Anyone who is self-employed should plan ahead when they are considering a home loan—often much longer than another borrower might have to plan. You might consider writing off fewer expenses in the two years leading up to your home purchase so you can show a higher total income to the lender.

It’s also very important that you review your finances to make sure personal and business expenses are clearly divided. Pay for all business expenses (especially large purchases) on business credit accounts instead of personal ones so lenders can clearly see the difference.

Show Income Increases

If your business is running successfully, make sure that you show that when you are ready to apply for a home loan by showing year-over-year increases. Most lenders will average out seasonal ups and downs by looking at total income over the past two years, but if your returns show that your income went down from two years ago to last year that could be a red flag.

Consider Other Options

If you are unable to qualify for the home loan you were considering because of self-employment, consider taking out a smaller loan on a condo or townhome first. You can also find someone who is willing to co-sign if that is an option for you.

It’s not impossible to get a loan when you are self-employed, but there are additional requirements and preparations you must take in order to ensure the highest chance of success. Talk to a mortgage lender in Utah today to find out more.

How Your Credit Score Affects Your Mortgage Payment

Do you know your credit score? The answer to this question for many people is no, but if you are planning to make a big purchase, such as a home or a vehicle, in the near future, you need to know what your score is.

What Do Credit Scores Mean?

Your credit score is a number between 300 and 850 that tells potential lenders about your creditworthiness as a borrower; in other words, how likely it is that you will be able to pay back a loan. It can be a significant factor in determining whether or not you are even approved for a loan, and also determining what your interest rate will be. The algorithm that calculates your score takes into account:

  • Your history of payments on previous loans or credit accounts
  • How much you currently owe on all credit/loan accounts
  • How long your credit history goes back
  • How much new credit you have taken out recently
  • The types of credit that you use

Generally your payment history and the amounts owed are the factors that weigh most heavily on your score, accounting for about two-thirds of your total score for FICO credit calculations (the most commonly used). The other three do impact your score, though not as much overall.

The Impact on Your Mortgage

A mortgage is likely the biggest loan you will ever get, so having a good interest rate could save you tens of thousands of dollars over the course of a 30-year loan, and a higher credit score is the way to get that better interest rate. Even a drop of 50 points in your credit score from 750 to 700 could raise your interest rates by 1 percent or more. It might not sounds like that big of a difference, but that will increase your payment by about $120 a month on a $200,000 loan, and it will translate to over $42,500 in additional interest paid over the course of a 30-year loan.

Getting Your Loan

Your credit score also impacts your ability to get approved for a loan. Most lenders will not typically provide home mortgages for people with FICO scores below 620, and if you do manage to get approved, you will likely have an interest rate much higher than you would if your score were even 100 points higher.

Improving Your Credit Score

It’s best to check your credit score well before you are planning to purchase a home—that way you will have time to improve your score if needed, or correct any errors you find on your credit report that are bringing your score down. One free credit report is available each year from Equifax, Experian, and TransUnion, so download those and go through them carefully to inspect all accounts. If all the information is correct, start paying down your balances, make sure you’re making payments on time on all your accounts and loans (including vehicles, student loans, and revolving credit), don’t open any unnecessary new credit lines, and your score should improve over time.