Self-employed people can come across several hurdles when they’re ready to apply for a mortgage. If you’re a freelancer, contractor, or business owner, here are six great ways you can combat those challenges.
1. Maintain Good Credit and Make Regular Payments
While self-employed people can apply for mortgages in the same way as employed people can, the tricky part is proving income. You’ll typically need to be self-employed for at least a year before you can apply for a mortgage, and you’ll have to be able to prove your income in ways other than using a W-2 form as employed people would do. The reason is mortgage lenders see self-employed people as a higher risk. You must be able to show you can make regular payments in order to qualify for a mortgage loan. You also need to maintain good credit. Ways of ensuring you keep a healthy credit score include paying your bills on time, keeping your credit card balances low, managing any debt well, and limiting your applications for other lines of credit.
2. Know the Current Mortgage Rates
You’ll want to make sure you get the best mortgage rate. Combatting that hurdle is easier than it may sound. There are two things you need to do. Firstly, you need to compare different lenders, as each one will have different rates and terms. Secondly, you need to keep an eye on current mortgage rates, as regardless of your personal financial situation, the rates can go up and down at different times depending on the state of the general housing market. You can learn things like how mortgage rates work, how low the rates can potentially go, and what the difference is between a fixed-rate mortgage and an adjustable-rate mortgage from this guide.
3. Be Aware of the Difference Between a Conventional and a Cash-out Mortgage
With a conventional mortgage, you borrow money to cover the cost of a property and pay that money back over the agreed period. Thinking ahead, you could consider a cash-out mortgage. It basically lets you access your home equity and refinance your mortgage. With your new loan, you could pay off the old mortgage loan and keep any additional cash to use for a variety of financial purposes. A cash-out mortgage could come in handy for self-employed people if you want to be able to access cash from your equity later down the line.
4. Know Your Maximum LTV
Your maximum loan-to-value ratio is the largest ratio allowable of a mortgage loan’s size in relation to the value of the housing. The higher your LTV is, the larger the portion of a property’s purchase price is financed. The LTV is basically used by lenders as a measure of risk, so it’s important you know what your maximum LTV is. For a home mortgage, the maximum is typically 80%.
5. Maintain a Clear Source of Income
As mentioned earlier, one reason why it’s more difficult for self-employed people to qualify for mortgages is that it’s more challenging for them to prove their incomes and ensure financial stability. To combat this mortgage hurdle, make sure you always keep up-to-date records. You can use things like a bank statement or credit report to prove to lenders that you are maintaining a clear source of income. This is the time to ensure you are not spending your money mindlessly but wisely. When it comes to spending, make sure that you are spending your money on things that matter or invest it to further grow your funds. Aside from having a clear source of income, consider having alternative income streams so when an emergency occurs, so you don’t have to rely on a single income making you more financially stable.
6. Consider a Mortgage Broker to Help You with the Application
A mortgage broker acts as an intermediary who brokers a mortgage loan on your behalf. If you want to ensure you have all the right documentation to prove you’re not high-risk and make use of professional expertise to better ensure you qualify for a mortgage as a self-employed person, you should definitely consider hiring a mortgage broker to help you with the application. Also, hiring a broker may be beneficial for you when you need to seek professional advice and consultation. And due to mortgage brokers’ line of work, they can attend to your inquisitiveness and shelved questions with the utmost care and knowledge. However, bear in mind that hiring a mortgage broker would mean spending your money, so remember to consider that when making the decision to use a mortgage broker or not.
The more you are aware of the mortgage hurdles that could come your way as a self-employed person, the easier it is to find ways of combating them. To find the best mortgage rate, you need to keep up-to-date with the latest rates and understand the differences and nuances between different mortgages. You can then take action to maintain or increase your credit score and calculate your maximum LTV. Armed with relevant records and the potential help of a mortgage broker, you can further eliminate boundaries to getting a mortgage when you are self-employed.
So, before you apply for a mortgage, remember to:
- Maintain good credit.
- Know current mortgage rates.
- Understand the difference between a conventional and cash-out mortgage.
- Know what your maximum loan-to-value ratio is.
- Maintain a clear source of income.
- Consider getting help with your mortgage application from a broker.
Once you heed to those above ways, you could have it easier than most self-employed people when it comes to tackling or evading mortgage obstacles.
Extra info that can tickle your inquisitive threshold: Let me introduce you to → Happily (or Budaya for those from Indonesia) is an amazing engagement app built for organisations to drive engagement amongst employees. It has amazing analytics and also provides activities for employees to be fully immersed in the organisation's culture and values. To find out more, click here or email email@example.com
Check out the media below to unleash all the fun and activities that can stroke your brilliance!