Getting approved for a Self Employed home loan isn’t easy as there are many factors to consider before making an application. But you can qualify for a mortgage when you’re self-employed. Let me tell you how!
The mortgage process can be a little bit different when you’re self-employed. It may involve more documentation and the qualification process may be more difficult.
That’s why it’s important to know how to qualify for a mortgage when you’re self-employed and there’s such great advantage in having a local broker working with you, focused on your goals.
Whether you’re in a salaried job or you’re self-employed, qualifying for a mortgage is a multi-layer process. Here’s how that process works for self-employed borrowers:
Step 1: Income
In most respects, this is the most critical aspect of your financial profile. The lender will be looking to verify the stability of your income, in addition to how much you earn.
To do that, they’ll typically require the following documentation:
- Complete personal income tax returns
- If your business operates as a corporation or a partnership, they’ll also require complete business income tax returns
- If you have not filed your most recent tax return, a profit and loss statement, audited by a CPA, may be required.
- A copy of a business license, or a written statement from a CPA confirming the number of years that you have been in business.
With this documentation, the lender will most likely average your business income for the past two years. For example, if you earned $80,000 in 2017, $120,000 in 2018, the lender will determine your stable income to be $100,000, or $8,333 per month ($80,000 + $120,000, divided by 24 months).
Income evaluation is the major criteria that makes qualifying for a mortgage as a self-employed borrower more difficult than it is for employed borrowers.
Step 2: Credit
Mortgage lenders typically look for a minimum credit score. And while it’s possible to qualify for a mortgage as a self-employed borrower, the likelihood of approval is greater if your score is higher than what’s generally required.
Since income is almost always considered an issue with the self-employed, a strong credit profile can help to offset that risk. This is why it’s more important for a self-employed borrower to regularly monitor their credit scores than it is for other borrowers.
Step 3: Debt-to-income ratio (DTI)
This is a mortgage industry term that describes the formula used to determine that your income is sufficient for the loan you’re applying for.
There are actually two ratios:
Housing ratio
That’s your new monthly house payment, divided by your stable monthly income.
If your stable monthly income is $6,000, in the new house payment will be $1,500, your housing DTI will be 25% ($1,500 divided by $6,000).
Your new monthly housing payment includes the new mortgage payment, plus monthly allocations for property taxes, homeowner’s insurance, flood or earthquake insurance, or homeowner’s association dues. It does not include utility payments.
Total debt DTI
That’s your new house payment, plus non-housing recurring debt, divided by your stable monthly income.
For example, if your stable monthly income a $6,000, and the new house payment is $1,500, but you also have $500 in recurring non-housing debt, your total DTI will be 33% ($2,000 divided by $6,000).
Recurring non-housing debt includes:
- monthly payments for credit cards
- car loans
- student loans
- other loans
- child support
- payments on other real estate you may own.
It does not include monthly auto, life and health insurance payments, or subscriptions, like a gym membership.
To find out whether you’re eligible for a self-employed home loan today, contact Financial Scope Melbourne on 0466 573 209 or admin@financialscope.com.au
Disclaimer: Your complete financial situation will need to be assessed before acceptance of any proposal or product.
Clint Thomasson
Clint has over 14 years experience in Financial Services working with major corporates including NAB, AMP, ANZ, and AXA. With a passion for Mortgage Broking, coupled with his outstanding interpersonal skills, Clint’s drive is all about matching your needs with the right financial solution. Whilst many businesses offer Finance Broking services, the difference you’ll find with Clint is his ability to listen, engage, retain knowledge and accurately match your requirements. Not only that, but he’s also a very friendly and genuine person with a great work ethic – you’ll have full confidence that he will deliver in a timely and highly efficient manner, every time.
