Owning a home is not out of your reach.
When the 2008 mortgage crisis resulted in financial calamity and millions of layoffs from U.S. corporations, many Americans responded by joining the ranks of the self-employed. While that showed impressive determination, self-employed people wanting to buy a house now must deal with another fallout of the crisis: a much tighter mortgage market, especially for those with uncertain or inconsistent income.
But that doesn’t mean you’re stuck in your rental apartment forever. If you are determined to buy a home, attention to these details puts you that much closer to a successful mortgage:
Your income. Your income is, of course, a crucial part of qualifying for a mortgage. But if you plan to include earnings from self-employment on the application, you’ll need at least two years of tax returns to demonstrate steady income over time. Also, keep in mind that while deductions for business expenses are often vital to self-employed people, the mortgage you qualify for will be based on your tax-return income rather than your gross revenue. If you’ve taken a multitude of deductions, your smaller taxable income may qualify you for a smaller loan.
Your credit rating. No matter how successful and responsible you’ve been on your own (and no matter how many people get laid off from once-safe positions), lenders may naturally view self-employment as a greater risk than a full-time job. That’s all the more reason to ramp up your credit rating wherever possible. You’ll need a score of 740, for example, to qualify for attractive rates on a conventional loan. Be sure to check your credit rating before applying, and take the time to correct any errors or other information that may lower your score.
Your debt-to-income ratio. Maxing out your credit cards may have been the only choice to jump-start your business. But the more debt you have, the less eager lenders may be to extend you a home loan. Getting your debt-to-income ratio to 41 percent or less can be a big help toward securing a mortgage.
Your assets and reserves. If you already own your home and want to refinance, the crucial factor will be how much equity you’ve already got in the property. A “cash-in” refinance, where you pay a chunk of money up front, may help you gain more favorable terms in the long run. If you’re buying a home, the more you can afford to put down in terms of a down payment, the better your chances of qualifying. Since self-employment earnings can be erratic, lenders also will want to know that you have cash reserves (plan on at least two months’ worth of mortgage payments) in case of emergency.
Attention to these details may help put you in your dream home, regardless of the obstacles. Just remember how many doubters you overcame to go out on your own in the first place.