Getting a home is something we all dream of, our dream house is something that we have thought about since childhood. Just two decades ago, buying a home was much simpler than today, all it required was having a consistent income with a full-time job. But the “Job” environment has changed for many people in recent years and the landscape will continue to evolve.
As of today, more people are inclined towards working on their own business instead of relying on a job. That’s why self-employed people don’t enjoy the benefits of being full-time employees. While a lot of self-employed people have a hard time facing this reality, it doesn’t mean that they have to get rid of their dream of owning a home. The process is just different than people having a full-time job.
Steps to Qualify for a Mortgage
1. Proof of Income
One of the first things that a mortgage lender asks for is proof of income, which is fairly easy for full-time job owners to provide. They can provide pay stubs and other documentation from an employer, a lender can verify a borrower’s history of income.
Self-employed people on the other hand don’t have a paper trail that they can use to provide consistent proof of income. Now, if a person is self-employed and they have a stable stream of income then getting a mortgage might not be tough.
Here’s what mortgage lenders are looking for to verify the income of self-employed individuals:
- Income stability
- Financial strength of a person’s business
- The ability of the person’s business to generate income in the future
A lender will need an explanation for financial history with time periods with little to no income (which isn’t rare for self-employed individuals). As the income is inconsistent for self-employed people, lenders require income history for a longer time.
2. Employment Verification
Apart from proof of income, a lender will also ask for documentation (emails or letters) from current clients, which clears the doubt for future income. Other key documentation could include providing state or other business licenses. If your personal business is registered with proper authorities and you have the documentation, then you can use the documents as proof of employment.
3. Tax Returns
People who are giving you money for a mortgage will also want to see full tax returns so they can develop a better understanding of actual income. This requires you to provide two years of personal and business tax returns. For a self-employed person to qualify for a mortgage, they have to provide proof that they’ve been working for a minimum of 12 months.
4. Credit Score
One of the key factors in securing a mortgage is a credit score. If you have a healthy credit score, then you’ll be able to secure a mortgage. Borrowers should consider paying off existing debts to ensure that they raise their credit scores. A credit score of at least 640 is required to get a mortgage.
5. DTI (Debt-to-Income Ratio)
Another major factor in the ability to get your mortgage approved is the debt-to-income ratio. DTI is a percentage of one’s gross monthly income that they spend to cover monthly debts (credit cards, car payments, personal loans, student loans, etc). Lenders usually prefer borrows that have a lower DTI because they have less risks. A DTI of less than 43% is the standard rate accepted by most lenders. Any self-employed individual that has a DTI of over 50% should consider reducing them before applying for a mortgage.