Getting approved for a mortgage can be pretty tough, especially with lender regulations being as stringent as they've been. And with the recently-imposed mortgage stress test rule changes, securing a home loan in today's market can be even more of a challenge.
But when you throw in being self-employed into the mix, the challenge is even greater. That's because lenders like to see proof of steady, reliable income, which is more typical of a full-time salaried job. If you've been working at the same job for the past 10 years and are hired on as full-time staff, for instance, your lender will consider your income stable.
But if you're self-employed and have some good years and some bad, getting a mortgage can be more of an involved process. And, if your business is relatively new, the situation can be even more difficult.
That said, securing a mortgage when you're self-employed isn't impossible. People do it all the time. Here are some ways to boost your odds of mortgage approval when you run your own business.
Beef Up Your Down Payment
The higher your down payment amount, the less money you'll have to borrow to buy a home. That also translates into more equity in your home, which can afford you with a lot more security and will also be less of a risk for your lender.
Your down payment amount will affect your loan-to-value ratio (LTV), which is the amount you borrow relative to the value of the home and is expressed as a percentage. Generally speaking, lenders like to see low LTVs when they assess a borrower's mortgage application. That means less risk on the part of the lender.
On the other hand, a higher LTV means less equity in the home, which places the lender at a higher risk. If you offer a tiny down payment, your loan amount will be a lot higher relative to what the home is worth, which means your equity will be much lower.
But if you can offer up a sizeable down payment, you can effectively minimize not just your risk and financial strain, but also the lender's risk. In this case, your lender might view you more favourably and be more willing to approve your mortgage application.
Have A Sizeable Financial Cushion
If there ever comes a time when you're strapped for cash, having some cash reserves in the background to fall back on can help ensure that you're able to make good on your mortgage payments even if you have a slow month or two with the business.
Having a large cash reserve on hand will show your lender that even if your business isn't doing that great at some point, you'll still be able to keep up with your mortgage payments.
Pay Down Your Debt
Your debt load will play a role in your lender's decision about whether or not to approve you for a mortgage. If much of your current income is already dedicated to paying down the debt you already have, you might not have much left over to put towards mortgage payments. Your debt-to-income ratio (DTI) is an important factor that lenders consider and is a measure of your current debt relative to what you bring in every month.
As such, try to make an effort to pay down as much of your debt as possible before applying for a mortgage. The fewer debt payments you have on the books before you start the mortgage application process, the better it will be for you when it comes to making your mortgage payments. Plus, fewer debts will also make it easier for you to get approved for a mortgage.
Give Your Credit Score A Boost
Your credit score is an extremely important component to the mortgage application process and paints a picture of what you'd be like as a borrower. A high credit score generally means you've been relatively responsible with your finances and spending habits, while a low score typically means you've been somewhat reckless with your spending and haven't been diligent with making timely bill payments.
Obviously, your lender wants to be certain that you'll be a responsible borrower, which is why they'd much prefer that your credit score is as high as it can be.
If your score isn't very strong, consider taking some time to improve it before you apply for a mortgage. This will make you a more attractive applicant in the eyes of the lender and may even help you snag a lower interest rate at the same time.
Establish A Solid History Of Self-Employment
Most mortgage lenders expect self-employed applicants to have been in business for at least two years. More specifically, those two years should show some form of positive cash flow. Whereas the average salaried applicant would be able to supply bank statements, self-employed applicants would have to provide some other form of documentation in the place of these statements.
If you are new in business and can wait a couple of years, consider taking some time to establish your business before applying for a home loan. This will help boost your odds of approval. Otherwise, you'll have to come up with some sound documentation showing that your business is a viable one and will be bringing in healthy cash flow into the near future.
There are plenty of perks to being self-employed, including being your own boss and not having any glass ceilings stand in your way as far as how successful you can be. But when it comes to applying for a mortgage, you may have a couple more hurdles to jump over compared to salaried applicants. Make sure to do your due diligence and prepare yourself so you can look as attractive as possible to your lender.