How to Acquire (and Manage) a Mortgage if You Are Self-Employed – Part 2
On our last article, we started discussing how it can be so problematic for people who are self-employed to acquire a personal loan or and, particularly, a mortgage. We also discussed a few general tips that could help you improve your chances of getting one of the other, even if you were faced by many obstacles.
This time, we continue with how you can procure yourself a personal loan or a mortgage and show you a few more detailed ways in which you can achieve that.
Stained income loans used to be one of the best options for self-employed people before the housing crisis. This is because that with that type of loan, the lender usually did not verify the borrower income flow. However, these days the vast majority of mortgage lenders will want to take a look at a borrower’s income for the past two years, especially if they are self-employed. So, using this metric, if your income increases from the first to the second year, then the lender will average both. However, if the income for your second year is lower than the one for your first, then the lender will use that number.
Another point that tends to cause a lot of stress is to document the source of the funds you get for a down payment. In fact, the source of any deposit of about $400 or more needs to be clearly identified with a paper trail. That might not sound like such a problem, but it turns out that a lot of self-employed borrowers have the habit of using their business and personal loan accounts almost interchangeably.
Another factor that you might want to consider when applying for a personal loan or a mortgage is your net income if you have a side-business. The erason for this is that approvals for personal loans and mortgages are based on net income, which means any business deductions will actually count against your application.
In order to counter this, as a self-employed borrower you should try to write off as many expenses as possible. This might hurt your chances of getting a personal loan or a mortgage a bit, but not as much as if you don’t do it. Also, if you consider depreciation on business purchases, this added income will benefit your net income and help improve your chances of qualifying even further.
Also, when tax day approaches, make sure to discuss any future personal loan plans with your accountant to plan for the future years. For example, if you plan on buying or refinancing a home int eh short term, then you might want to hold on writing off your business expenses (at least not all of them).
Now, if you are planning to or are currently working on a long-term project as a self-employed professional, then by all means you should ask to be brought on as a W-2 employee. To achieve this, you could offer to sign a simple contract to exempt your long-term client from any kind of claims for unemployment and from other legal challenges by the time the project is over. With this, you can be placed on a payroll as a freelancer professional while at the same time providing banks with a W-2 mortgage or personal loan application.
Lastly, you can also consider downsizing your price range at least on the first home you consider buying. For example, if your net income is of $50,000 or so, then it will look a lot more attractive for lenders when applying for a mortgage if the property you want is around $200,000 than if it costs $430,000.
And there you go. Some of these tips might be easier to perform than other, but rest assured that if you try your hardest and consider every aspect of your finances, then you will successfully acquire you dream personal loan or mortgage.