How Self-Employed Professionals Could Qualify for Mortgage

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How Self-Employed Professionals Could Qualify for Mortgage

younghomeBeing Self-employed is one of the most empowering experiences of the life. Individuals rendering freelance services and owning their own business enjoy the luxury of making their own decisions. However, all the virtues of being self-employed might fall short when it comes to applying for a mortgage for your new house. Freelancers and small business owners may find it difficult to get approval for a loan let alone favorable mortgage payment terms.

If you are a self-employed individual looking for a mortgage, cheer up as you can still qualify for a mortgage with some preparation.

Evaluate your tax returns for last two years

Every lender will start with your tax returns for the last two years to get an idea of your monthly income. If you are planning to get an idea about the same, add your gross income for the last two years and divide it by 24. You will get your average monthly income and lenders will focus on this figure before offering a loan. If you have had some trouble generating profits for the past few months, now might not be the best time to apply for a loan. You need to improve those figures to qualify for a loan.

Your lender will ask for permission to access your tax records. Unlike the last decade, you simply need to give the lender access to your tax records and they will manage the remaining paperwork.

Debt-to-income ratio is the key

If you are anxious about the amount of loan you can avail, it depends upon your current debt-to-income (DTI) ratio. Like the word means, your DTI must indicate the capability to make regular repayments. In general, your housing debt should not exceed 28% of your income whereas your overall debts should be less than 36% of your current income.

If you have a car loan or credit loan, repay it as soon as possible and improve your DTI ratio.

Higher credit score smoothens qualification process

Every salaried individual understands the importance of maintaining good credit score and so should you. A higher credit score will allow you to steer through the qualification process. Start by applying for latest credit report and review it to identify any potential mistakes. If you are planning to buy a new house in the next 6 to 8 months, avoid applying for new credit accounts.

Limit your tax deductions

Many self-employed individuals maximize their tax deductions to lower their tax bill. On one side, it might help you save some money but it will lower your taxable income, which means lower chances of mortgage approval. Avoid taking multiple tax deductions starting two years before applying for the loan. It will boost your taxable income and hence, the chances of mortgage approval.

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