Mortgage Application Tips for Self-Employed Borrowers

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Hello all! This is a 2nd-time collaboration with Senior Friendly Info! (Thank you for sharing your knowledge with our readers.)

This time they are sharing information about mortgage application tips for self-employed borrowers.

Disclaimer: All content provided is for informational purposes only. Please read my full disclaimer here for more info. Please note that this article is written on 3/25/2023.

The key to being approved for a mortgage as a self-employed individual is to create an application with a solid financial standing, and reliable employment history which exceeds the lender’s expectations.

Here are outlined the following criteria that your lender will scrutinize:

Employment Verification

As you are applying as self-employed, you need to provide documents confirming your business identity and existence, this includes:

Employer Identification Number (EIN)
Doing Business as Name (DBA)
Articles of association (if applicable)
Current and past contracts with clients
Federal or State Level Licenses

If you don’t have some of this information for your business, you may want to consider filing for an LLC. It’s easy to open an LLC if you take advantage of an online formation company. They can make filing an LLC with the state quick and easy.

Income Verification

Only if the lender feels confident in your ability to repay the loan will they approve your application. Hence, to provide a holistic picture of your finances submit the following documentation:

Personal tax-return forms
Personal bank statements dating back at least two years
Business financial statements, including profit and loss statements, balance sheets, cash flow statements, and more.

Making Your Application Stand Out

Here are three ways to exceed lender’s expectations and increase your chances of getting approved:

Low DTI Ratio: As reported by CFPB, a debt-to-income ratio below 43% is ideal. The key to a low ratio is to pay off existing debts before applying for a mortgage.
High Credit Score: If you have a credit score above 670, you’ll be considered a low-risk borrower. But as a self-employed, you should aim to have the highest score possible. This can be achieved by paying credit card bills on time, partly utilizing your credit limit, and keeping debt low.
Large Down Payment: A down payment of less than 20% of your home’s value can hinder the lender’s confidence in your application. You can overcome this barrier by saving up for the down payment months before applying for the mortgage.
FHA Loan: If you’re not able to put 20% down, you may qualify for a VA loan which offers flexible down payment options and less stringent qualification requirements.

Applying for a mortgage can be stressful when you’re self-employed. However, implementing these steps towards creating your application will help you secure your desired mortgage.

Senior Friendly Info is a website that provides tips, tricks, and advice to stay active and engaged as you age. https://seniorfriendly.info/

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