Thinking of ways to help self-employed RVA buyers to obtain a mortgage. We recognize that being your boss comes with many advantages, but it also comes with its very own issues.
Firstly, you have a flexible working schedule and the freedom to make your own decisions. More importantly, your potential income is uncapped! You can make as much money as you desire to make. However, being self-employed is quite a different playing field when it comes to obtaining a mortgage. Getting approved for a mortgage becomes a little harder than it is for people drawing a steady paycheck. It’s no secret that mortgage lenders look favorably on adequate taxable income. Furthermore, a positive debt-to-income ratio, and stable income are just as important.
Proof of Stable Income
As with any other loans, lenders require borrowers to prove their income. Any time that a self-employed worker must prove their income, it can make everything difficult. With your income fluctuating so much from month to month, you’ll need to prove it on yearly basis.
For example, as an owner operator, you can show that you make $70k a year driving your own trucks. However you might only work for 6 months out of the year for the first year. Then 9 months for the second year, and 6 months again for the last year. Read this article to see the top 10 docs needed for self-employed workers to prove their income.
Proof Taxable Income
Another common challenge that self-employed mortgage borrowers experience is not having enough taxable income to convince lenders that they are able to meet their monthly repayments on the mortgage. Inadequate taxable income prompts the lender to assume that a borrower does not make enough money to afford a home.
A Debt-To-Income Ratio of More Than 43%
Debt-to-income ratio (DTI) is an important calculation used by mortgage lenders to determine what amount of a mortgage payment that a buyer can afford. DIT is obtained by dividing all your monthly debt payments by your gross monthly income.
Lenders want borrowers with a debt-to-income ratio below 43%, and the lower the DTI is, the better. A debt-to-income ratio higher than 43% is generally not persuasive to mortgage lending institutions as they perceive such homebuyers as riskier borrowers. Therefore, you need to aim for lower than 43%. The best way to do that is to use the 28/36 rule.
Whether you’re self-employed or not, lenders will look at your bank statements. Conversely, if you receive a w-2 at the end of the year, then you’re more than likely going to be able to show regular deposits. Because of the fluctuating nature of income from self-employment, it becomes harder for self-employed individuals to get approved. Unlike salaried applicants who may be required to provide their latest payslips and a few documentation, self-employed persons are required to provide bank statements for two to three years.
Finding a Mortgage Lender Ready to Work with You
Entrepreneurs can apply for a mortgage a any bank that they choose, however, lenders and institutions tend to shy away from borrowers whom they perceive as riskier. Typically, lenders are extra cautious with self-employed applicants and will take a closer look at your financial position. Most lenders prefer working with people that have steady paychecks. Therefore you’ll need to jump through a few more hoops. But even though that is the case, you can still get a mortgage. I suggest that using a referral from another self-employed colleague with a mortgage.