Self-employment is becoming popular, and it is a great way to have control over your life and future. However, there are some downsides to being self-employed. For example, it is more challenging to get a loan. There are some essential things business owners have to think about if they want to prepare for their future.
Owning a home is one of the most satisfying experiences. It is an excellent investment, and it provides security when you retire. However, as a self-employed individual getting a home loan takes more thought. When you work for a company, you have verifiable pay stubs. So, it is easier for a lender to loan you the money you need to buy your dream home.
Luckily, there is an option for business owners, a self employed mortgage. The one thing to keep in mind, though, is that obtaining one of these loans requires you to meet different qualifications.
Knowing what you need to do before you attempt to purchase a home will save you time and prevent you from feeling frustrated during the process. Begin to prepare as soon as possible, so you are ready when the time comes.
Working with a Mortgage Lender
It is essential to find a mortgage lender that has experience working with self-employed individuals. A lender who is willing and able to work with self-employed borrowers knows the ins and outs of getting you approved as quickly as possible, which makes the entire process a lot easier.
Verifying Your Income
Lenders require a loan policy from a federally regulated mortgage insurer (FRMI); this offers them some protection if you default on your loan.
FRMIs have requirements that lenders must meet to obtain mortgage insurance. Some of the things FRMIs accept from a lender as proof of income from a loan applicant are:
- Documentation of verifiable income from an independent source;
- The income verification source is not easily falsified;
- The source can explicitly verify the income amount;
- That the information provided by the applicant and the independent verification source are not contradictory.
In addition, there are other regulations lenders have to follow according to regulation B-21, which governs all loans where mortgage insurance is a requirement. For example, the amount of money they are allowed to lend in relationship to the value of the home.
Planning for Your Down Payment
When you are buying a home, you need to know how much money you need to bring to the table so that you can save. As a self-employed person, the amount you have to put down is significantly higher than a typical T-4 employee.
Under the B-21 guidelines, a federal bank is only able to lend you up to 65 percent of the appraised value of the home you are purchasing. That means you will need to pay for the remaining 35 percent. So, if you are buying a house that costs $400,000, you need to put down $140,000.
Other Self Employed Mortgage Requirements
Most lenders view loans to self employed mortgages as higher risk. So, you need to make it worth their while to lend to you by having a higher credit score and a lower debt to income ratio. These two factors weigh heavily on a lender’s ability to take a chance on offering you a mortgage, so the less financial obligations you have, the better.
Avoid making other large purchases in the months before you apply for a loan to keep your debt to income ratio. Also, make sure you pay all of your bills on time and resolve any outstanding credit issues before applying for a loan.
It is important to note; there are options for people who own their own business. Obtaining a self employed mortgage just takes a bit more money and effort. However, following these simple guidelines will help you meet the requirements necessary to take out a home loan.