The mortgage application process can seem intimidating for the average prospective home buyer, but even more so if you are self-employed. Fortunately, some financial institutions have programs that solve the mortgage mystery for those who work for themselves. Let’s take a look at some of the challenges for the self-employed and how to overcome them.
One of the main obstacles for a self-employed individual seeking a mortgage loan is qualifying income.
“We find that business owners often write off as many business expenses as possible,” said Patricia Wendell, Senior Vice President, Residential Operations and Credit Manager for Seacoast Bank. “The idea is to lower your taxable income, but that can leave a potential borrower with too little qualifying income when applying for a mortgage loan.”
Bank Statement Method
Mortgage programs for the self-employed often allow the bank to look at bank statements instead of tax returns when computing qualifying income. Utilizing this method, the program still requires 24 months of uninterrupted self-employment history and the interest rates are often 0.125% to 0.250% of a percentage point higher, but it may help you as a self-employed applicant to get a home loan you otherwise wouldn’t qualify for.
Another question many applicants have is the debt-to-income ratio requirement. Generally, the requirement is the same – 43% or less --for both employed and self-employed applicants. This requirement is just what it seems – the applicant’s total debt can’t exceed 43% of personal income. It’s designed to ensure that you don’t bite off more mortgage than you can chew. Obviously, inability to pay is bad for the lending institution, but it can bring unimaginable stress and turn the borrower’s dream house into a nightmare.
Smart Borrowers Obtain Pre-Approval
According to Wendell, smart borrowers can reduce stress by applying for pre-approval before running out to look at potential properties. This requires a full credit review, but if the originator sees some challenges in your profile, then he or she can advise you and provide guidance on what actions are needed for loan qualifying.
“If they meet with their banker before starting their search for a property, they will be in a better position when they find the home of their dreams to negotiate with the seller and secure the needed financing,” said Wendell.
Other tips to consider as a self-employed applicant include:
Tips for the Self-Employed Mortgage Applicant
1. Find out your credit score in advance of the application.
2. Make sure your credit history is accurate; remove any errant charge-offs or corrections.
3. Review your provable income: tax returns or bank statements.
4. Don’t transfer money from account to account prior to application unless it’s well documented.
5. Avoid new credit applications in the period leading up to the loan application.
6. Make sure all debt payments are paid on time.
7. Speak to a loan originator to better understand your credit profile, liabilities and assets and how much you comfortably can afford to borrow.
Don’t Change Your Loan Profile After Applying
Once the application is approved, the bank will run a final credit check just before closing. Wendell cautions borrowers about doing things that might negatively affect their credit after their application is approved. She told the story of borrowers who took out loans for a car and furniture between application approval and closing. The additional debt was discovered in the final credit check and was a deal-breaker resulting in the cancellation of their closing.
In another instance, after his application was approved, a borrower went and paid off several debts using assets verified by the bank for the closing. They were planning to pay closing costs with an undisclosed gift from a relative. This change delayed the closing while the gift was properly documented and the loan re-underwritten.
The best approach is to not change your credit profile including new loans, changes in employment, income or documented assets once you have applied for a loan.
“It’s even more critical that no changes are made between approval and closing,” said Patti Craft, Loan Underwriting Manager for Seacoast Bank. “Also, be transparent with your banker. They’ll help you understand the process and avoid mistakes that could delay or even derail your ability to get into that house you’ve been dreaming of.”
Seacoast offers a special mortgage program for current account holders that are self-employed. If you are interested in learning more about this program or in becoming a Seacoast Bank account holder, then please call 866-710-5778 or visit your nearest branch.