More and more people are choosing the self-employed life, but until the rest of the world (i.e. the banks) catch up, it can still feel like there are a lot more hoops to jump through to convince a lender that you’re a safe bet and secure a self-employed mortgage. The good news is that if you get clued up, get prepared, and have the right documentation in hand, there’s no reason why you won’t qualify for a self-employed home loan, and you shouldn’t expect to pay higher rates than any other borrower for the privilege.
BUYING A HOME
Different lenders might take different things into account when assessing you for a self-employed home loan, and each will have their own thresholds and requirements, but it pays to get a clear idea of the key things that any lender will be looking for so that you can give yourself the best chance of approval.
Qualifying For A Loan
1. A Sustainable Income
This is the big one. Any lender is going to want to see proof of your self-employed earnings, and reassurance that this level of income is reasonably stable. Typically, they will want to see at least two years of accounts or tax returns – the more, the better! – and they will use these to calculate an average annual profit. They’re looking for a general upwards trend, so don’t worry about the little ups and downs, but make sure that you can explain any significant fluctuations.
If you haven’t been working as a contractor for at least two years, you don’t need to write yourself off for a self-employed home loan. Some lenders will still consider you if you can show that you have regular work lined up, and especially if you have been working in the same industry for many years but have only recently become self-employed.
If you haven’t already, it’s worth enlisting the services of an accountant to make sure that your accounts are complete, accurate and up to date. Lenders like the reassurance of a certified or chartered accountant, and financial records that are professionally presented. It saves you the headache, too!
2. A Good Credit History
The second most important thing for lenders is that you have a solid track record of managing your finances and making payments on time. One of the things they will check is your debt-to-income ratio (your total monthly debt repayments divided by your gross monthly income), and they will usually want to see a DTI ratio of 42% or lower.
You can check your own credit rating online to see how you stack up. Make sure that you’ve cleared any debts or outstanding payments, and check the report for any obvious mistakes or red flags that you should address before applying for a loan.
3. A Significant Down Payment
Finally, a healthy deposit goes a long way towards getting lenders on your side. It’s particularly helpful if you’re still building up your business and don’t have two years of good-looking accounts behind you.
What Documents Do You Need?
Do your best to establish what a lender will want to see before you meet, and make sure that all documents are complete and up to date. The idea is to make it as easy as possible for them to understand your financial situation and to feel reassured that you’ve got it all under control. When it comes to qualifying for a self-employed mortgage, every little helps!
Here are some of the key documents a lender might want to see:
- At least two years of accounts or tax returns
- Business registration or license documentation
- Business bank statements
- Evidence of employment history
- Evidence of all streams of income, including Social Security or disability payments
- Most recent statements from savings accounts
- Evidence of a solid deposit and/or equity in an existing property
- Evidence of any other assets
- List of debts and minimum monthly repayments
For expert advice and to get started with your self-employed home loan, check out rocketmortgage.com.
SELLING A HOME
Getting the finances in place to move house is just the start. Now you’ve got to navigate the real estate side of things, and the first decision to make is whether to work with a realtor or go it alone...
Working With a Realtor
- Experience – This might be your first time selling a home, but an experienced realtor will have been through it hundreds of times before. They will be able to break the process down for you, explain it in plain English, and give you their professional advice. Things don’t always go completely smoothly, but your realtor will have seen it all before and know what needs to happen next.
- Access – Professional realtors are likely to know how and where to market your house for the best exposure, and may well have access to the best tools and techniques. They will also know the market, so should be able to help you to get the best sale price (– they’re working on commission, so it’s in their interests too!)
- Connections – The best type of realtor is one who will work hand in hand with your mortgage lender, so that the whole process is as smooth and seamless as possible. They should communication with all parties, on your behalf – buyers, lawyers and lenders – and know when to push to keep things moving.
For more about the benefits of working with a realtor, check out inhouserealty.com.
- Cost – If you go down the for-sale-by-owner (FSBO) route, one of the key benefits is that you don’t lose out on the realtor’s commission, so you get the benefit of the full sale price. Typically, commission can be 5-6% of the sale price, to be split between your agent and the buyer’s agent, so this can add up to a significant saving.
- Control – A private sale puts you in full control. You set the price, put together the listing, and take responsibility for showing your house off to potential buyers. Many self-employed people like this more personal, hands-on approach to selling their home, but of course it depends on your time availability.
- Online tools – With sites such as forsalebyowner.com, listing and marketing your house online is getting easier and more accessible all the time. You can put your own listing together, get great exposure and communicate with interested buyers, without big fees.
For more about the benefits of a private sale, read more about how to sell a home without a realtor.