Self-employment is a dream for many, but if you are searching for a mortgage, it makes things difficult. The biggest problem for lenders is that there are no W-2s or pay stubs to use for income verification. Banks must rely solely on the income tax paperwork filed by someone who is falls into this category in order to determine financial standings. With self-employment, income levels can rise or fall quickly, so even with income tax statements in hand, there is no way to predict if business will remain steady for the life of the loan.
Those who are fall into this category often face temporary income reductions when a client leaves or fails to pay on a timely basis. Take writers, a popular form of employment in today’s world. Freelance writers can find steady employment working for online companies, magazines, large company’s advertising departments or newspapers, but payment is not always guaranteed. Even with a contract, there is no guarantee payment will arrive on time. Many freelance writers spend hours daily tracking down payments, resending invoices or pressuring clients to pay up. If a payment is made three weeks late, that freelancer then must pay bills three weeks late. Financial institutions know this and hesitate offering mortgages to people who might find themselves short on cash from time to time.
Being employed this way does not mean you will automatically be denied a mortgage loan. It just means that you will be required to do a little more research. Banks are going to ask for:
- The past two or three year’s income tax forms.
- Monthly business expense and revenue statements for the current year.
When you apply for a mortgage using income, you must realize that the lender will be extra cautious. Generally, you will be required to put down 20 percent of the purchase price automatically. This means if the home you want to buy costs $200,000, you will only be granted a loan for no more than $160,000. Banks are also going to take a much closer look at your credit score. If your credit score is low, it will be harder to be approved.
If you have not been self-employed for at least two years, this makes it even harder to gain a mortgage. Other programs may help.
- Stated Income Mortgage Loans: A stated income mortgage loan is made without paperwork, but the interest and points you are charged will be higher. With this type of loan, you will state your monthly income and vow that it is accurate. The bank is going to charge you the higher fees because this type of loan is high-risk. Generally, stated income loans should be used as a last resort and only if you are certain about having a steady income as presented.
- Interest Only Mortgage Loans: You have probably heard plenty about interest-only loans in the past year. With these loans, your monthly payment covers the interest amount only. If you pay extra, the additional amount goes towards principal. The problem with these loans is that the interest rates are adjustable. While you might start out the loan with an interest rate of 6 percent, it can quickly climb to 15 percent within a few months. Not having a fixed monthly payment can be stressful on some, especially those who are self-employment and already face changes in their monthly income.
Those who fall into this category, men and women can find suitable mortgages. They must realize that it might take a little extra time finding a program that fits their needs and does not charge excessive fees and rates. If you are self-employed and planning to purchase a home, make sure you leave plenty of time to thoroughly research your different options. Having pre-approval in hand will make the purchase of a new home much easier because you will know exactly how much a bank will be willing to lend you up front.
