Self-Employed and Want a Mortgage? Tough, But Not Impossible
If you’re self-employed and in the market for a new home, get ready for some extra challenges when you apply for a mortgage. Although you’re likely in better financial shape than most, that doesn’t mean lenders won’t make you jump through extra hoops.
It’s hard not to take it personally, especially when you consider how hard you work, how diligently you pay your bills, and that a simple W-2 and pay stub from a full-time employer would eliminate most of the red tape. Nonetheless, lenders have a lot of reasons to make the self-employed show additional proof of credit worthiness.
Besides proving income, income history, and the prospect of future income, the biggest barriers raised are due to the larger than most debt typically carried by the self-employed. This contributes to the fact that 47% of the self-employed have reported credit scores below 720. Compare this with 23% among those who are not self-employed and you see why lenders cast a more cautious eye to the self-employed.
Lower scores, however, are not always a good reflection on the borrower’s credit character, especially since self-employed incomes are typically much, much higher than other potential borrowers. Instead, the lower scores are likely due to the fact that most self-employed take on — for business purposes — loans and open lines of credit under their own names. This, of course, can count against their credit score. This type of debt can be explained to lenders successfully, but it typically involves forwarding reams of paperwork, and it can all be overwhelming for someone running their own business.
The bottom line? While you will likely have to contend with more paper shuffling, and likely a larger down payment than your employed counterparts, it’s entirely possible for the self-employed to qualify for a mortgage. Just be organized and be patient, and don’t forget to try and find a real estate agent who’s comfortable working with self-employed borrowers.