Tips To Get Approved For A Texas Mortgage For Self-Employed
You are self-employed and want to get approved for a mortgage. It might seem difficult but it’s not when you have the right paperwork.
Self-employment offers a number of benefits. You are free to work anywhere you want and anytime you want to work, and there is no boss looking constantly over the shoulder. However, it has its own challenges, especially at the beginning. When you are self-employed, you might find it difficult to get approval for a mortgage as lenders typically find it harder to assess the income of self-employed individuals.
However, it doesn’t mean that you won’t get approved for a mortgage. You need to understand the process used by lenders for assessing self-employed income for mortgage applications. You need to do certain things to make your application more appealing. Here is a list of some of the important things you should know about getting approved for a mortgage when self-employed.
Biggest Challenge – Enough Income For Mortgage Approval
The most important thing lenders look at when approving mortgage applications is that the borrower should be able to pay back the money which means you need to show proof that your income is enough to easily cover the mortgage payments. Having a W–2 makes it easy as it shows the lenders that you have a steady paycheck and you will continue to earn money to cover the mortgage.
Being self-employed also means a fluctuating income and there is also the possibility of your income shrinking enough that you are unable to pay the bills. This is the reason, mortgage lenders typically ask for proof of two years’ worth of income from self-employment in order to ensure that a study revenue stream exists. You will need to provide the last two years’ tax returns and you might also be asked for a complete list of your existing assets and debts. If you are a business owner, you might be asked by the mortgage lender to provide two years’ worth of profit and loss statements for your business.
Things get tricky for you as mortgage lenders take out all the deductions when considering your income. It means the expenses you have written off for the business including costs of business trips, office supplies and phone and Internet services among others for taxes also lower your income that is considered by mortgage lenders. This increases the debt to income ratio for you. The debt to income ratio is used by lenders to figure out the amount of money coming in and going out every month. You are unlikely to get approved for a mortgage in case your debt to income ratio crosses 43%. Simply put, if you are making debt payments that are more than 43% of the income, you are unlikely to get approved for a mortgage.
However, you should not have issues getting approved for a mortgage in case you are making steady money from being self-employed and you can show documents to prove that your income has not gone down or even risen with time.
In addition to these, mortgage lenders also consider some other factors.
Important Factors Other Than Income For Mortgage Approval
As mentioned above, your debt to income ratio is the most important thing lenders look at when they consider your mortgage application. If you’re making $ 1 million a year but $ 900,000 is used for paying off existing debt, it is going to be of no use. Therefore, you need to make sure that your debts are kept down to a manageable level. You need to ensure that your debts do not exceed 43% of the income and ideally, this ratio should be kept under 36%.
Lenders also check your credit score. It simply shows how responsible you are with borrowed money. The credit score is used by lenders for assessing the risk of lending to an individual. If your credit score has a number of repossessions and late payments, lenders will be hesitant to approve your mortgage. Similarly, if your credit utilization ratio is high, it will also affect your chances of getting approved. The credit utilization ratio is the ratio of the amount of credit you are using to the amount of credit that is available to you. Needless to say, your credit score should be kept as high as possible to improve your chances of getting the mortgage approved.
Mortgage Application Denied – Things To Do Next
In case a lender denies your mortgage application, the first thing you need to do is figure out why it has happened in order for you to take corrective measures. You should get some kind of signal from the lender why your application has been denied and that should be a good starting point for you.
In case your application was denied due to a lack of enough income, there are few options available to you. You have the option of making a bigger down payment if that’s possible for you as that will reduce the amount of loan. You also have the option of finding a cosigner who will cosign on the mortgage for you. Keep in mind that co-signing carries a lot of risks and there are no rewards which means it’s not something that should be asked slightly.
If your application has been denied due to having too much debt, your focus should shift to paying off the existing debt before reapplying for the mortgage. It has a couple of benefits. It will bring your debt to income ratio down and it will also bring down the credit utilization ratio which, in turn, will help in boosting your credit score.
You should be able to get the mortgage approved with one of the above-mentioned strategies. If things do not work out, you might have to wait for some time and try again later. During this time, you should try to increase self-employment income and once you have started earning a bit more money, it’s time to reapply. All the necessary financial documentation should be kept ready to give to the mortgage lender when you reapply.
Self-employed individuals need to jump through a couple of extra hoops in order to get approved for a mortgage. It’s possible to get approval but you need to prove that you are making a steady income through your business.
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