Many people earn a living by freelancing, working short-term jobs, or by being a sole proprietor of a business. If you fall under this category, it’s possible to secure a home loan, but it may be more difficult than someone with a consistent income.
Lenders will want you to prove that you earn a reliable income, and that you have little to no debt. As a self-employed person, you won’t have the documents that someone in a traditional job has, such as a W-2. Because of this, the steps to get a mortgage are different than usual. Here are the things that lenders will need when you seek a loan.
- Income Verification: Since you don’t receive paychecks, provide up to two years of tax returns to prove you earn a sufficient income. Tax returns are descriptive of your income, and take into account tax writeoffs.
- Income Trends: Prepare to explain any significant fluctuations in your income. Lenders will look at your financial history, and will take into account dips and dry spells. Remember to keep thorough documentation of your income, and if you have any gaps, be upfront about them.
- Debt-to-Income Ratio (DTI): Your DTI is the percentage of your income that goes towards paying off debt. DTI requirements can vary by lending program, but the lower the better.
- Credit Score: Credit score requirements also vary by lending program, but your credit score can make or break your chances at getting a mortgage. The higher the credit score the better. Credit scores are divided into ranges, from “Poor” to “Excellent.” Check what range your credit score falls in, and make a plan to improve it if needed.
When you compare home loans, take note of the down payment that it requires. Some loans need you to pay at least a 20% down payment. The larger down payment you’re able to make, the better your chances are at getting approved for a mortgage.
If you have an IRA, you are able to withdraw up to $10,000 for the purpose of buying a home. If you withdraw from a Roth IRA, you won’t have to pay taxes on the amount. However, you need to be younger than 59 ½ years old to access this money. Consider using this as a way to fund a down payment.
Overall, you’ll need documentation that proves your income is consistent, and a good DTI and credit score. If you provide the lender enough to tell a full story about your finances, they’ll be able to determine if you’re a reliable borrower.
