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How to get a mortgage if you’re self-employed

You’ll need to show steady income and a solid credit score to get approved.

One of the largest expenses most of us will face is buying a home. And if you’re self-employed, it has become more difficult since the COVID-19 pandemic to qualify for a loan within your means. If you’re a gig worker, sole proprietor or independent contractor, you’ll need to demonstrate steady work history and recent tax returns to get a mortgage.

Recent changes for self-employed mortgages

In response to the economic uncertainty caused by the coronavirus pandemic, the home loan industry has seen some massive changes. And unfortunately, self-employed workers are bearing the brunt of these new policies.
Before the pandemic, a self-employed person could have been approved for a mortgage with outdated financials, a mediocre credit score and a down payment of 10% or less. But now lenders require more recent proof of income, a higher FICO score and a down payment of at least 20%.
Yet despite the new rules, it’s still possible to secure a self-employed mortgage — but only if you’re properly prepared.

You’ll need proof of financial stability

If you’re thinking about applying for a self-employed mortgage, these tips could help you get the green light from a potential lender.

  • Raise your credit score. Lenders such as JPMorgan Chase now require applicants to have a minimum FICO score of 700. If you need to increase your score, there are many ways to do so.
  • Lower your debt-to-income ratio (DTI). Your DTI is the percentage of your gross monthly income that goes to pay debt. Lenders like to see a DTI at 36% or less.
  • Organize your accounting. The more evidence you have to back up your income, the more likely you’ll qualify for a mortgage. Gather your bank statements, tax returns, profit-and-loss statement, monthly expenses and a list of assets. If you get a signed statement from an accountant, that’s even better.
  • Prove you’re making money. Previously, you only had to show that your business made money in the past 120 days. Now, the window is 10 days. To prove you’re still profitable, provide a recent pay stub or bank account statement showing deposits.
  • Aim to make a larger down payment. If you can afford a down payment of 20% or more, you’re more likely to be approved.

You’ll need documentation to prove your income

Although banks and brokers have different lending criteria for self-employed mortgages, here are the documents you’re most likely to need post-2020:

  • Bank account statements. This includes personal and business bank account statements from the past 60 days. Anything older isn’t relevant to lenders.
  • Year-to-date profit-and-loss statement. Provide either an audited profit-and-loss statement or an unaudited statement accompanied by the past two months of your business’s financials.
  • Balance sheet. Provide an overview of what you own and what you owe. Include all income and assets assessed within the past 60 days.
  • Tax returns. Prepare to present your personal and business tax returns from the past two years.
  • Business license. This government-issued document proves your business entity exists.
  • Current receipts and contracts. It’s not always required, but having these documents ready may give your lender added peace of mind.

A personal essay can help bolster your application

Although it’s not necessary, providing a written explanation about how and why your business will survive the pandemic could possibly spell the difference between approval and denial.

5 steps to getting a mortgage

If you’re confident you can qualify for a self-employed mortgage, here’s an overview of how to apply.

  1. Calculate what you can afford. Determine the amount you can afford for a down payment, your monthly mortgage payments, possible HOA fees and other costs associated with buying a home.
  2. Compare lenders. Compare fees and interest rates from multiple credit unions and online lenders. Determine which lenders are most likely to approve you based on your income, credit score and down payment. Loan marketplaces are a good place to start.
  3. Complete loan applications. Fill out mortgage applications online, by phone or in person from a few promising lenders. Expect to submit financial documents and personal information.
  4. Get a preapproval. Get a preapproval letter with the amount you can borrow to show sellers that you’re serious about buying.
  5. Wait for underwriting to approve your loan. After you’ve been preapproved, it can take a few days for lenders to verify your finances and determine your final approval.

Watch out for hidden costs

Not all mortgage lenders are above-board, and some unscrupulous lenders attempt to squeeze every dime they can from their customers. To help you avoid predatory lending and get the best deal, here are some red flags to watch out for:

  • High fees. Lenders that charge percentage-based fees often call them mortgage points or discount points. If a lender is asking for more than three points, keep shopping.
  • Hidden charges. Some lenders intentionally omit taxes and insurance payments in their calculations. Ask if these line items are included in the monthly payment a lender proposes.
  • Prepayment penalties. Find out if a lender charges a fee for prepaying your mortgage early if you plan to refinance for a lower term, sell or pay off your loan before the term is up.
  • Be wary of lenders that approve anyone. Expect to pay high rates and fees to lenders that boast about accepting bad-credit applicants.
  • Yield-spread premiums. Lenders pay brokers rewards for unnecessarily inflating interest rates. If you’re working with a broker, make sure they aren’t trying to sneak this past you. Keep an eye out for service release fees, rate participation fees and par-plus pricing, which are all industry terms for yield-spread premiums. As a rule of thumb, if you’re not paying an origination fee, you’re likely paying this premium.

Bottom line

Since the pandemic, mortgage rules are now more stringent than they’ve been in the past. But if you have a steady source of verifiable income, now is an excellent time to take advantage of historically low interest rates. If you’re ready to take the first step toward homeownership, start by comparing rates and lenders and learning more about how mortgages work.

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