If you start researching the steps involved in securing a mortgage, you’ll see one piece of advice recur frequently: make sure that you have two years of paystubs to show a lender. This is no problem for a person who gets a W2 form at the end of the year, but what if you get a 1099 — or what if you’re a self-employed entrepreneur? Luckily, there are still ways to get funding for a new home. The Kaufman Chamber of Commerce explains some of these strategies below.
How Mortgage Lending Works
Before you can seek out a mortgage as a self-employed applicant, you should know how the lending process works and what loan officers will be looking for. There are three primary factors that a lender will look at — your current income level, your source of income, and your credit score.
Self-employed borrowers will need to prove their income by providing two years of tax returns. A lender will look at this documentation as well as the gross sum of income earned in order to assess your qualification for a mortgage. Documenting two years of income from the same clients may improve your chances of approval.
Your credit score is another one of the most important factors in determining whether you’ll be approved for a mortgage — and if so, how much its interest rate will be. Your credit score can range from 300 to 850, and it is formulated based on your payment history, credit utilization, and the age of accounts on your report.
How to Save Money on Your Home Purchase
Regardless of whether you’re self-employed or not, buying a home is expensive. One of the easiest ways to reduce the cost is to improve your credit score. The higher your score is, the lower your loan’s interest rate will be — and vice versa. You can improve your credit by paying off high-balance accounts, removing inaccuracies, and diversifying your credit accounts.
Another way to save on a home is to buy it “as is.” This means that you’ll forgo any guarantees from the seller regarding the home’s condition. You can save a lot of money by going with this option, but you should be sure to consult an attorney, arrange for an inspection, and review the property records to identify any red flags.
Use current real estate information to determine which option is best for you. Start by looking at the average home prices in your desired area. For example, the median house price in Kaufman, Texas is currently rising and is sitting at $257,500. If you can find an “as is” property that has a price low enough to offset the renovation costs, then it may be worth pursuing.
Mortgages for a Home Business Expansion
When you’re researching mortgages, you should calculate how much you can afford. According to Lexington Law, borrowers should adhere to the 28/36 rule. This rule dictates that no more than 28% of your gross income should go to your living expenses — and no more than 36% should go to your total debt.
This rule is useful if you’re looking for a mortgage to move into a new house for your home-based business. If your business is thriving and it’s time to expand, looking for a new home can help you do so. You can upgrade to a place that has a dedicated home office or space for inventory. Remember that lenders will review your credit and income when considering your application.
Unconventional Earners Can Find Unconventional Lenders
Even if you’re an entrepreneur with an unconventional source of income, there are still mortgage options available, especially if you earn sufficient income and have a good credit score. When you can’t verify your income with a W-2, use every strategy to improve your chances of being approved, and look especially for lenders who will work with you.
The Kaufman Chamber of Commerce offers plenty of information and resources for local entrepreneurs. Visit our website to learn more.