Article | 3:02 min read

Self-Employed Americans Should Try to Keep Their Credit Scores Up

Credit and Debt

A business owner standing in a flower shop

While there are plenty of benefits self-employed Americans enjoy while working outside the normal realm of a nine-to-five profession, there are a few drawbacks to working for one's self.

One of the biggest snags is how hard it can be for self-employed Americans to successfully borrow from a bank or financial institution. A recent study from Zillow revealed self-employed borrowers receive 40 percent fewer home purchase loan quotes than other potential borrowers [1].

Zillow stated self-employed workers claim they make more money than other borrowers, but a major complication is the lack of good credit scores from the self-employed. Self-employed borrowers are twice as likely as regular employees to report a credit score below 680.

A score below 700 tends to cause loan rates to go up and makes other loan options obsolete. Scores from 700 to 740 will make a person eligible for most programs, while a score above 740 will make a person eligible for the best rates around, according to Zillow.

Battle through the paperwork
Zillow revealed self-employed online mortgage shoppers received six loan quotes for every 10 offered to borrowers who were employed by someone else.

"That's the first battle," Erin Lantz, vice president of mortgages at Zillow, told CNBC [2]. "The second battle is actually getting through all the paperwork."

Lantz said the paperwork for a potential borrower who isn't self-employed is lofty, and for those who are, the task becomes that much more difficult for a lender.

"A lot of lenders talk about it like manufacturing costs," Lantz said. "If you have to make a loan - it takes a lot of time in people and paperwork - that's how much costs to product the widget, to produce the loan. For a self-employed borrower that cost is higher."

Borrowers should make sure all of their paperwork is in good order if they hope to expedite the lending process.

Still, Marcie Geffner, a freelance writer from Los Angeles, told CNBC the loan process was rigorous despite her being prepared with the necessary paperwork.

Geffner said she was self-employed the last time she secured a mortgage and provided copies of bank statements and three years of tax returns when she tried to refinance her home last year.

"Then the lender Googled me - which was very creepy and unexpected," she said. "Then they started asking for the name of my clients. That was where it started to feel intrusive - crossing a line into my business that I did not expect."

But CNBC reported the difference between a personal and professional life is often intermingled for self-employed Americans. Self-employed potential borrowers could be held accountable for business debts that don't show up on a personal credit report.

How to acquire a mortgage as a self-employed borrower
Just because it's harder to land a mortgage loan as a self-employed borrower doesn't mean it's impossible. Investopedia said borrowers who are struggling to secure a mortgage should consider signing with a co-borrower who is a W-2 employee, such as a significant other or trusted friend. In turn, this shows a lender the self-employed person has a reliable income to fall back on to pay the debt.

Borrowers should also be aware of their debt-to-income ratio, according to Zillow. A debt-to-income ratio compares a person's monthly housing costs with how much they make each month. Zillow stated a debt-to-income ratio can be as high as 43 percent, though a lower percentage will make borrowers more attractive to lenders. A low debt-to-income ratio can also help borrowers nab some loan exceptions in other areas.


[1]. The Self-Employed Borrower's Guide to Getting a Mortgage

[2]. Self-employed? Good luck getting a mortgage

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