Self-employed? Tips to help you navigate the mortgage process
When you’re self-employed, you often work harder than anyone else you know. That’s what it takes to be your own boss. While rewarding, it comes with a lot of added responsibility. This is especially true when applying for a mortgage.
“Self-employment can complicate the mortgage process for one very simple but critically important reason,” said Eric Hamilton, president of Vanderbilt Mortgage and Finance. “Lenders need to know you will have the income to afford a loan payment. This sometimes requires people who are self-employed to provide more detailed information and paperwork than those who are traditionally employed.”
Proof of income
It’s not only good business sense for lenders to know a borrower can afford a mortgage before they make a loan, federal law also requires they do so. The evaluation process typically requires fewer steps for people who aren’t self-employed — those who get a salary for working for another person or company. The lender will review the applicant’s total income, existing debt, credit history and score, as well as other factors, and base the decision on that information.
However, when you’re self-employed, proving your income can be more complex. About 10 percent of people working in America are self-employed, according to the Bureau of Labor Statistics (BLS). If you’re among those 15 million people, it can be more difficult for you to document your income and prove you can afford to pay back the amount you’re asking to borrow.
“Lenders may ask self-employed applicants to complete a 4506T form, which allows the lender to look at the applicant’s tax documents, including recent income filings,” Hamilton said. “They will also likely request a professionally prepared profit-and-loss statement and balance sheet for the business to show you have steady income throughout the year between tax-filing times.”
Improving your chances of approval
Fortunately, if you’re self-employed, you can take steps to be better prepared when beginning the mortgage application process. Hamilton and the team at Vanderbilt, which specializes in financing mortgages for manufactured homes, offer some tips:
* Before you apply for a loan, pay off as much debt as possible. Mortgage lenders will consider your debt-to-income ratio, which compares your total income to the total amount you owe.
* Save up a substantial down payment.
* Work to improve your credit score by paying all bills on time and reducing your debt. Payment history and credit-utilization ratio (the total credit you have available compared to the amount you’re actually using) are important factors in determining your credit scores.
"Being prepared before you start a mortgage application and getting your finances in order can help make the mortgage process go much smoother,” Hamilton said. “The mortgage application process is just one step on your journey to home ownership, but it’s an important one.”
To learn more about mortgages for manufactured homes, visit www.VMF.com.
All loan subject to credit approval.
Vanderbilt Mortgage and Finance, Inc., 500 Alcoa Trail, Maryville, TN 37804, 865-380-3000, NMLS #1561, (http://www.nmlsconsumeraccess.org/), AZLic. #BK-0902616, Loans made or arranged pursuant to a California Finance Lenders Law license, GA Residential Mortgage (Lic. #6911), Illinois Residential Mortgage Licensee, Licensed by the NH Banking Department, MTLic. #1561, Licensed by PA Dept. of Banking.