This is an issue that has come up more and more and frustrates business owners who make a good living at what they do but their income fluctuates from year to year, making it difficult to get approved for a mortgage. If this is you, and you are self-employed, either as a freelancer or as the owner of your own business, there are some things you can do to improve your chances.
Make sure your credit score is in good shape.
While your ability to pay back a mortgage is the most important factor in approval, your credit score is a close second. If you have a credit score in the high range, something above 750 or 760, it will help you get approved for a mortgage. If your score is in the mid to high 600s, it is still possible to get a mortgage. Your credit score can change each month, and here are ways to boost your score: First, make sure you pay all bills on time. Second, pay down your debt levels, keeping them at 25 percent or less of your credit limit. Third, do not make any large purchases or apply for new credit soon before you apply for a mortgage. Every time someone checks your credit, your score goes down and large purchases mean your debt to income ratio could be too high to get the mortgage approved.
Have a large down payment.The more money a bank lends you to buy a house, the more risk they are taking on that money not being paid back. If you are self-employed and are considered a higher risk to begin with, one way you can alleviate some of that risk is to be able to put down a large amount of money. Putting down 20 percent is standard for a conventional loan, and you should be willing to contribute at least that much. Putting down at least 20 percent also will save you money in the long run, because you won’t have to pay for mortgage insurance, and you will pay less in finance charges over the life of the loan.
Have significant assets.One way to put a lender at ease about your ability to pay for a mortgage is to have significant reserves in the form of assets. If you have large amounts of money in regular savings, brokerage and retirement accounts, it offers a reserve for you to tap should your income take a dive. Other forms of property, that you own and are paid off and have value, also help.
Income TaxYour income tax is something the mortgage companies look at to verify your income. So, remember that only the money you pay taxes on is counted as income. You may think that writing off all allowable expenses is good, but it actually hurts you when trying to get a mortgage based on your income.
To learn more on this or any other real estate topics, call me at 610-812-6946. If I don’t know, I will find the answer and call you back!
Teri Eide is a real estate agent working with Better Homes and Gardens Real Estate out of Phoenixville.
