Many individuals are tired of working on someone else’s terms and schedules. We are seeing a continuous increase in gig workers and freelancers applying for mortgages. Traditional banks aren’t always the most welcoming when it comes to loans for the self-employed. They need to see your last two years of income tax documents, and in most cases, self-employed people are unable to show their actual earnings on their income documents. When doing your taxes, you have business write-offs and expenses deducted from your gross earnings, making your net earnings a lot less.
Without a regular job, a steady paycheck, and a letter of employment, you will have to work a bit harder to get yourself approved for a mortgage. Proving your income is the most challenging part, mainly because your income is variable. It will be trickier to convince lenders to loan you money when they aren’t sure your income will remain consistent. You have two options for proving your income: you can use two years’ worth of income tax paperwork or a stated income approach to show your revenue through business bank account statements and proof of self-employment.
Good credit is something everyone should strive for, but especially someone who is in business for themself. You will need to show a strong credit score despite having a variable income. You want to show the lenders that you can pay your bills. It will give the lender more confidence to take a chance on loaning you the money. Lenders are typically looking for a minimum score of 680. We would recommend holding off applying until you can get your score to at least that mark.
Whether you are a gig worker or an employee, the bigger your down payment, the less risky your loan is. We recommend having a sizable down payment with a minimum of 20%, which will prevent you from needing mortgage insurance. It will also prove that you have a reasonable amount of cash saved even though you do not have a steady income.
Have you heard of the debt-to-income ratio? The debt-to-income ratio is calculated by dividing all your monthly debt payments by your gross monthly income. The lower those ratios are, the more appealing you are to a lender. If you have huge credit card balances or car loans, this will increase your ratios. Paying down as much of that debt as possible will increase your chances of getting approved for a mortgage. When you are ready to purchase a home, avoid making any big financing purchases until after your deal closes.
For more information on obtaining a self-employed mortgage or increasing your credit score, please reach out; anyone from our team at Dominion Lending Centres NasaKasa will be happy to help.
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