What Business Owners Need to Know about Getting a Mortgage
Getting a mortgage as a self-employed person is often more difficult than if you’re a regular salaried or hourly employee. While you’ll need to fill out the same application as any other applicant, proving your income and regular business activities can be a more complex process than providing pay stubs and W-2s from the last 2 years. But difficult doesn’t mean impossible! To help you get the mortgage you need to buy a home, our specialists have put together a small guide that can make your mortgage application process go smoother.
Qualifying for a Mortgage While Self-Employed
Income stability is one of the most important factors that mortgage lenders consider before approving the applications of self-employed individuals. Therefore, the first thing you should do before applying for a mortgage is to get your personal and business finances in shape. In addition, you’ll need to prove the existence of your business. To determine your eligibility for a mortgage, a lender may require you to submit the following documents:
- Proof of steady income, including 2 years of personal and business tax returns (schedules K-1, 1120, 1120S, or Schedule C, depending on your business structure), balance sheet, and/or certified profit and loss statements;
- Proof of uninterrupted self-employment activity for at least 2 years (e.g. letters or emails from current clients indicating that service has been performed; a statement signed by a licensed CPA, enrolled agent, or tax preparer; a membership letter from a professional organization that confirms at least 2 years of self-employment; any state and/or business licenses you hold; business insurance coverage; etc.);
- Documents attesting your business assets, such as real estate, equipment, or bank accounts set up specifically for your business;
- Evidence of any other assets you have, including readily available money, such as savings, investments, emergency funds, SEP IRA, or assets that could sell fairly quickly for cash; having assets or some serious cash set aside increases your chances of getting a mortgage because the lender knows that you’ll be able to continue to make your monthly mortgage payments if your income dips or dries up temporarily;
- A DBA issued at least 2 years ago.
If you’re using a DBA, the lender may also require company invoices, business account statements, and/or creditor statements. If you have been self-employed for less than 2 years, you might need to provide additional documentation regarding the probability of continued income. In addition to asking for proof of income and self-employment, the lender will also look at your credit score, credit history, and DTI and LTV ratios.
Credit Score and History
Based on your credit score and history, which indicate how you handled debt in the past, a lender can determine whether you’re a trustworthy borrower. Credit score requirements typically vary depending on the type of mortgage. In general, you’ll need a minimum credit score of 620 in order to qualify for a conventional mortgage or VA loan. If you have a lower score, you may get an FHA loan, as long as you meet the other requirements. Irrespective of the type of loan you intend to apply for, a higher credit score will put you in a more favorable position to get a mortgage with better terms and conditions.
DTI and LTV Ratios
In the simplest terms, the DTI (Debt-to-Income) ratio indicates how much of your gross monthly income goes toward paying your debt each month, including the debt that you currently have as well as the estimated mortgage payment. As a general guideline, a DTI ratio of 43% is the highest limit that conventional mortgage lenders require in order to approve mortgage applications. One important thing to know as a business owner is that lenders often include business-related debt, including auto loans, credit cards, lines of credit, and business loans, in the total DTI ratio. Depending on the amount of debt you have, that could cause your DTI ratio to exceed the allowable limit. Additionally, lenders will calculate your LTV (Loan-to-Value) ratio, which represents the relationship between the mortgage amount you require in order to purchase a home and the value of the property used as collateral. While you can get an FHA-insured mortgage with an LTV as high as 97%, conventional mortgage products require lower LTV ratios, which basically means that you’ll need to come up with a larger down payment.
If you’re self-employed and want to buy a home, it’s essential to know that there aren’t any lenders specializing in mortgage products for self-employed borrowers. That being the case, what really matters when looking for a mortgage as a self-employed person is the interest rate along with the terms and conditions a lender is willing to offer you. For more details about any additional requirements, you should meet in order to qualify for a mortgage as a self-employed individual, feel free to contact North Florida Mortgage today!
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