Are you self employed and wondering if you can get a mortgage to purchase a home? According to a recent Zillow study conducted the self-employed receive significantly fewer purchase loan quotes even though they make roughly 80% more money than other prospective borrowers. One major factor contributing to the struggles of the self-employed getting a mortgage is their credit score being below 680. Do not let your credit score get you down as a self-employed individual as this is only one piece of the mortgage process. Make sure that you have a great presentation to deliver to your lender so they have something to leverage other than that lower credit score.
When getting approved for loans lenders look at eight items for a successful mortgage with specific rules pertaining to what they will accept and what they will not accept. If you get a good grasp on these eight items and work with your loan representative to present yourself in a way that makes you shine it will make the process a little less frightening. Here are some details on the eight items loan representatives are most interested in looking at: Credit Score, Occupancy, Property Type, Loan Product, Loan Amount, Loan to Value Ratio, Debt to Income Ratio, and Reserves after you Close.
- Credit scores higher than 740 will be eligible for all loan programs and the most competitive interest rates. Credit scores in the 700-740 with be eligible for most loan programs, but with slightly higher interest rates. Credit scores lower than 700 will limit some loan options and interest rates will be higher. One question to ask your mortgage representative is whether or not there are credit score exceptions if the other 7 factors strongly support your financial affordability.
- Mortgage Lenders look at the occupancy of the property with owner-occupied properties being the lowest risk and secure the most competitive interest rates. Second homes are considered more of a risk, while rental properties carry the highest risk for lenders, and come with the highest interest rates.
- Looking into buying a Home vs. a Condo? This also plays a role in financing your future purchase. Single family homes are the least risky while condo’s carry a risk due to the homeowners association’s financial health. When purchasing 2-4 unit properties these become even more risky to lenders, with the exception of you living in one unit and renting the others. Downtown San DiegoLofts and Condos also have the factors of building litigation which causes other financing issues. When purchasing a condo with litigation you need to have at least 20% or more of a down payment.
- If you choose financing for the longest fixed period, like a 30-year-fixed, your interest rates will be higher, but long term loans like these are considered less of a risk. Another option is an adjustable rate mortgage (ARM), like a 5-year ARM, can help some borrowers qualify because the interest rates may be lower, but this does not reduce your risk level in the eyes of your loan representative.
- A mortgage lender will will typically sell loans up to $417,000 to Fannie Mae and Freddie Mac. This means that your lender will be less likely to make exceptions on these loans because of the Fannie Mae and Freddie Mac specifications. Loans amounting to greater than $417,000 are kept on a balance sheet for lenders making exceptions more likely.
- Your loan to value ratio is the percent of the loan you are requesting in relation to the value of the home you are purchasing. If you are looking for exceptions in any of the other 7 areas lenders look at this is one of the most important. You will want to make sure this ratio is as low as possible, so this means you will need a larger down payment.
- Your monthly housing cost plus all of the other monthly debt as a percentage of your income is you debt to income ratio (DTI). DTI can be as high as 43% if necessary, but having a low DTI is another critical factor in making exceptions in other areas. As a self-employed individual be sure to seek out a professional who knows how to analyze self-employed income sources, such as tax returns or business financial statements.
- Lenders look at what your reserves are after you close and typically like to see housing costs coverage for a minimum of 2-6 months in your bank account. If you are seeking an exception in another area lenders may require significantly more reserves than 2-6 months.
Ultimately, you will want to create the best presentation of your financial situation in order to begin the process of purchasing property as a self-employed individual. Make sure you do your research and pick a lender who specializes in this area.