Today's mortgage lending environment is a pretty tough one. Without a hefty income and a high credit score, you could be jumping through hoops just to get approved for a mortgage. And thanks to the mortgage stress test that applicants have to go through, getting approved for a home loan just got enough tougher.
Then throw being self-employed into the mix. As if getting approved for a mortgage wasn't already a challenge for people with decent jobs, it's even more difficult for people who pursue their passions and built a business around doing what they love. That's because lenders like to see proof that big money is rolling in so that borrowers can adequately cover additional monthly mortgage payments.
But when it comes to doing business, a shortfall in cash flow one month can really make it tough to cover a mortgage payment. That's why lenders tend to be a little stricter with the self-employed compared to salaried workers.
So, does that mean your dreams of homeownership are doomed just because you're an entrepreneur? Definitely not. You just might have a little more work to do to convince your lender that you're financially capable of handling a mortgage.
Here are some things you can do to increase your chances of securing a home loan as a self-employed applicant.
Boost Your Credit Score
Do you know what your credit score currently is? If not, you might want to pull your credit report to see where you stand. Generally speaking, lenders want to see credit scores of at least 680 before approving mortgage applications. And in the case of self-employed applicants, a higher score is definitely better.
Do what you can today to give your credit score a boost. The higher it is, the better the odds of having your mortgage application approved.
Come Up With a Big Down Payment
Lenders look at a bunch of factors when they determine who they deem to be a responsible and less risky borrower, and the loan-to-value ratio is one of them. This number basically represents your loan amount relative to the value of the home you plan to buy.
The more you have to borrow, the higher your loan-to-value ratio will be, which makes you a riskier borrower in the eyes of your lender.
But you can effectively lower this ratio by putting forth a big down payment amount. This will help you gain more equity in the home right away and reduce the amount you have to borrow, which is a much more favourable situation, both for you and the lender. The more equity you have in your home, the more financially sound you'll be, which your lender will appreciate.
Get Rid of Your Debts
The more debt you have, the more of your income will be required to cover it, leaving less left over to cover an additional debt in the form of a mortgage. If your debt load is already pretty high, you'll be less likely to get approved for a mortgage because your income may not be adequate enough to support another payment.
Do yourself a favour and make every effort to reduce your debt load, which will free up more of your money to be dedicated to your mortgage payments. If your lender sees that you don't have as much debt to cover, they'll be more comfortable approving your loan application and more confident that you'll have the financial means to carry additional debt.
Save Up Extra Cash to Have on the Backburner
Many people find themselves in financial hot water because they are unable to pay some of their bills as a result of a temporary financial setback. This often happens because there is no financial cushion to fall back on.
Instead, having some extra cash reserves on hand can be helpful if you ever go through a lull in your business from time to time. Even if your business's cash flow isn't as strong one month, you'll still be able to continue on with your payments if you've got some extra cash in your account to cover these payments.
Showing your lender that you have extra assets on hand can help strengthen your position and help you increase your chances of mortgage approval.
There are a bunch of things you can do right now to help strengthen your position when you apply for a mortgage, even if you're self-employed. You might have a few extra hoops to go through, but there’s no reason why securing a mortgage can’t be in the cards for you even if you’re self-employed.