Whether you are a small-business owner, a freelancer, or an independent contractor, you are probably no stranger to all the benefits of being self-employed. It can be one of the most empowering feelings in the world being able to make money without having to report to a boss or commit to the daily 9 to 5 grind, and you will also get to enjoy tax breaks and other financial loopholes that aren’t available to typical workers. Unfortunately, your career as an independent worker is likely to put you at a disadvantage when you decide you are ready to buy a house. Banks consider self-employed customers to be much riskier borrowers, and they will often make you jump through several hoops if you would like to be considered for a mortgage loan.
You may have a perfect financial record, and your small business may be thriving, but lenders are typically uneasy when dealing with self-employed borrowers. Because the nature of self-employment is more volatile than having a steady paycheck, the onus is on you to prove to the bank that you are worthy of its trust. Still, you should never give up hope. Lenders issue mortgages to self-employed borrowers all the time, but only after they have met several conditions. While the specific requirements will differ slightly between each bank, here are a few tips for how to qualify for a home loan even if you are your own boss.
1. Provide History of Solid Income – In the past, banks would issue self-employed borrowers “stated income” loans. They would simply ask to look at your bank statements over a few months as a way of proving that you were making enough money to qualify for your loan, and they would take you at your word when you claimed what your overall annual income worked out to. Unfortunately, with the recent collapse of the housing market, this type of loan has all but disappeared. Today, you will need to provide income tax statements as proof that you are making enough money in your self-employment to actually carry a home loan. If you have recently gone out on your own, you are very unlikely to qualify for a mortgage, as most lenders require the last two years of tax returns to even consider self-employed applicants. To calculate what the bank deems to be your annual income, it will usually average the last two years together. If you earned £100,000 last year but just £20,000 two years ago, the bank will consider your income to be £60,000, regardless of how your are doing this year.
2. Protect Your Credit with Your Life – Because lenders will consider your employment situation to be risky regardless of any assurances you can give them otherwise, your credit score will be a major influential factor in determining whether you qualify any number of mortgages. Self-employed applicants with credit scores well above 700 are much more likely to be considered for a home loan than those with lower scores because the bank views this number as the only verifiable representation of your responsibility with money. For this reason, you need to guard your credit score with your life. Making sure never to make late payments or other financial blunders is even more essential when you are self-employed.
3. Have a Lot of Cash in the Bank – In addition to great credit and years of taxable income, you should also try to have as much money in the bank as possible. Lenders will often want you to make a down payment as high as 30 percent if you wish to qualify for a mortgage. You will also look much more appealing as a potential borrower if you are self-employed with £1 million in the bank than if you don’t have much in the way of savings.
4. Consider a Cosigner – Unless you can thoroughly impress your potential lender with your credit score, tax returns, and valuable assets, you might find you get turned down for a loan. You may still be able to qualify, though, if you have a friend or relative who is willing to act as your guarantor. Since someone you are close to will probably be sympathetic to your self-employed plight, they may be willing to cosign your loan as long as you can prove to them that it’s not a risky decision. If you have no other options and are determined to buy a house, partnering with a cosigner can sometimes save the day for self-employed borrowers.
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