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How to Get a Mortgage When You Are Self-Employed

March 1st, 2010

mortgage-self-employment.jpgAs lenders usually want to see definitive proof of regular income before they will give you a mortgage, it can be difficult to get yourself on the property ladder if you are not currently an employee. Fortunately, there are mortgage options available for the self-employed but they will not always be as favorable as those that are on offer for those who command a steady paycheck.

Stated Income/ Stated Asset Mortgage (SISA)

As the name suggests, a Stated Income or Stated Asset mortgage is based on the idea that you inform the mortgage lender of your income. In the majority of cases, they will not look to prove that you are telling the truth other than to verify the source of your revenue. However, if your mortgage lender does choose to verify both the source and amount of your income, you will need to provide a list of recent clients and any other money-making activities that have contributed to your overall income (such as financial investments).

In addition, you may also need to submit IRS forms 4506 or 8821. The former allows your mortgage lender to request a copy of your tax returns from the IRS so that they can cross-check the income that you have stated. There is a $39 charge for this. The latter form gives your mortgage lender permission to access forms at IRS offices for the tax years that you have claimed income. There is no charge for this.

No Documentation Loans

This form of mortgage loan does not require you to verify your income level or provide proof of where it comes from. Because of this, it is preferable for self-employed business owners who have experienced a loss or have not enjoyed much of a profit and would otherwise struggle to be accepted for a mortgage product. As mortgage lenders are taking a bigger risk in offering a mortgage to anyone without a regular income who could easily default on repayments, the interest rate attached to this type of mortgage loan is considerably higher than on a ‘regular’ mortgage or even with an SISA loan.

If you apply for this type of mortgage loan, do not be tempted to be economical with the truth when it comes to your actual income. While mortgage lenders will not seek to verify this, you can come unstuck if you cannot really afford the repayments on the loan that you are offered because you were not truthful in the first place.

Full Documentation Loans

If you are lucky enough to receive a set income every month (for example, if you are paid a fixed freelance retainer), you can apply for a full documentation loan. This requires you to prove your income through documents such as tax returns, profit and loss statements, and balance sheets.

Joint Mortgages

If you are not looking to buy alone and your partner or prospective housemate is a W-2 employee with a steady income, mortgage lenders will look on your self-employed status more favorably as they can be have added confidence that there will be no defaults on the repayments if your self-employed income happens to fluctuate.

Cosigners

If you are intending to buy property alone, a relative or close friend can co-sign your mortgage loan as backup. This is a major responsibility, as he or she will be obliged to meet repayments for you if you default.

Higher Deposits

If you are in a position to offer a sizable deposit, you can significantly reduce your mortgage loan. In addition, you can improve your chances of being approved for a mortgage loan if you have an emergency fund that you can dip into to cover repayments if your income fluctuates.

Improve Your Credit Score

For the majority of lenders, high credit scores can improve your chances of being given credit or a loan. Often it will also mean that you qualify for lower interest rates in comparison to individuals with less impressive credit scores as lenders can be more confident that you can handle your finances in a responsible manner. A low credit score tends to indicate that you are liable to fall into debt, and this will not do much to convince mortgage lenders that you are an ideal candidate for a mortgage loan. If you are currently in debt, try to pay off as much of it as possible before you actually apply for a mortgage. This will free up more of your money for repayments if you are approved.

Relevant Article: What to Bring When Applying for a Mortgage


This article was supplied to us by “Sally A.” from Constant Content.


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