Buying a house is one of the most significant financial decisions you can make in your entire life. Picking up hundreds of thousands of dollars in debt isn’t something you should take lightly, and it’s not something that banks and lenders blow off, either.
Traditionally, getting a mortgage when you’ve got a good job and solid credit isn’t difficult. Banks view your steady paycheck as a huge asset, assuming that your paycheck will continue for the foreseeable future. Having that job gives you the aura of stability, making you look like less of a risk to the lenders who are considering you for such a big loan.
These days, however, there are a lot more people who are self-employed and can’t bring a W2 to the lender’s office. In many instances, these folks have incomes that are bigger and more stable than what they had coming in from their traditional jobs, but because their work isn’t “traditional” they’re seen as a major risk to lenders.
So how does someone who’s self-employed qualify for a mortgage? The good news is that there’s almost always a way to make it happen. The not-so-good news is that there can be a few more hoops to jump through.
The Main Thing to Know About Getting a Mortgage When You’re Self-Employed
Banks and other lenders are getting more comfortable with writing mortgages for people who are self-employed, as long as there’s a solid track record of profitable business behind them. How do banks define “solid?” Generally speaking, you’ll need two years of tax returns proving that your business is profitable before a lender will consider you.
Once you’ve got 2 solid years behind you, that should be more than enough to qualify for a conventional loan at a good rate — or at the best rate your other financial factors (like credit score) would allow.
This isn’t too different from the standard advice to have a solid work history of two years in the same field/industry for traditional employees. It’s something to be aware of, though, if you’re planning to jump ship from your regular job and/or buy a house within a two-year period.
Your Best Bet for Getting a Great Mortgage While Self-Employed
Many people go to a bank or a specific lender when they want a mortgage. The best thing you can do with your unconventional financial position, however, is to find an independent mortgage broker. Mortgage brokers aren’t loyal to any one lending institution, and they aren’t bound by a single institution’s regulations, either. This means they’ll be able to “shop around” and explore every available option for you, instead of being stuck in-house. This means you’ll be much more likely to find a mortgage product that will work for you.
Ask your personal contacts for recommendations if you don’t already know a mortgage broker. Be sure to discuss your situation with your Realtor, if you’re working with one, and ask for broker recommendations. To do a little more vetting, see if the brokers you dig up are members of your state’s professional association and the National Association of Mortgage Brokers. Membership isn’t mandatory, so membership may indicate a broker who takes things like ethics and continuing education a little more seriously. That can only benefit you in the long run.
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Mortgage Brokers vs. Specific Lenders
When you’re self-employed, it can be a real pain to go through one of the bigger banks to get a mortgage. There are a lot of hoops to jump through and it can be difficult to get things to happen quickly. Smaller financial institutions sometimes get more satisfactory results, though their fees might be higher. Some home buyers prefer to pay the higher fees and work with a smaller, more nimble loan officer who can make things happen more quickly.
There are also online lenders that readily work with the self-employed. One of the most commonly used lenders is Quicken Loans. The process can be much easier than a more typical venture through a big national bank, but there’s some debate about whether or not Quicken’s loans are more expensive than the loans you’d get through another institution (or a Quicken loan that you obtain through a broker).
The bottom line here is to do your homework. This is a major purchase, and it’ll require some legwork if you want to find your best option.
Other Ways to Get Mortgage-Ready
While you’re building your two-year self-employment history, there are some other things you can do to make yourself more attractive to mortgage lenders. Clean up your credit and build a better credit score. Limit any new credit accounts and inquiries for the time being — no new cards or loans. Pay off as much consumer debt as possible, including credit card balances and car loans.
The more you can clean up your credit, pay down your debt, and build savings, the more attractive you’ll be to your would-be lenders.
Further Thoughts on Getting Mortgages When You’re Self-Employed
Ultimately, when you’re shopping for a mortgage you need to be ready to have a lot of conversations, do a lot of research, and spend a lot of time considering all your options. A home loan is a huge investment on your part, and a huge risk for the lender. Working with someone who is experienced in the process will be a major benefit to you, so be sure that you’re vetting not only the mortgage products you consider but the mortgage broker or loan officer who’s working with you to obtain them.
You might be in a non-traditional situation, but you can still get the home of your dreams with a mortgage that won’t give you nightmares!