Part II: A Mortgage Guide for the Self-Employed
Welcome back to our new series: The Housing Market. In Part II of the series, we have a guest blogger, Cherie Mclaughlin (blogger for Couch Based Biz), who will provide some helpful tips for the self-employed trying to navigate the mortgage process. Take a read below and feel free to reach out with any questions you may have!
From a mortgage lender’s perspective, individuals with permanent employment positions are safe bets as they have a predictable income. While having variable income as a freelancer can pose a challenge, this article by The Wise Exchange will explore various ways one can create a strong profile and secure the mortgage they need.
1. Start Planning Early
Rather than rushing into the process only to be met with resistance from lenders, take the time to develop strong finances and get the paperwork in order.
Research Lenders
Your areas of focus should include credit score requirements, down payment expectations, and customer service record. According to research by Benzinga, the best brokers for self-employed mortgages are Rocket Mortgage and New American Funding.
Freelance for at least Two Years
As reported by Next Advisor, having a strong freelance work history will provide lenders with an idea of your earning potential and the ability to pay monthly EMIs. Additionally, if you have long-term contracts with clients, adding them to your application will help strengthen your profile.
Establish a Limited Liability Company
Selling your services under an LLC will allow you to pay lower taxes and use business expenses as tax write-offs. This will help save up more funds towards your down payment.
2. Exceed Lender’s Expectations
While lenders will have natural reservations regarding self-employed applicants, here are two ways to showcase your financial stability.
Provide a Large Down Payment
The higher down payment you’ll make, the better interest and repayment terms you’ll receive. Additionally, it’ll help improve the lender’s confidence in your ability to repay the loan.
The down payment is often paid in two parts:
Home Deposit: After the seller accepts your offer, you’ll need to pay a deposit equal to 1-3% of the purchase price. This is known as earnest money and is used towards your closing costs.
Home Closing: In addition to normal closing expenses you'll need to pay the balance of your down payment during the closing proceedings.
Get a Guarantor
A guarantor is an individual who agrees to pay the loan if you default on payments. This can be your spouse, parents, or other family members. For self-employed applicants, having a guarantor increases the chances of approval.
As a freelancer, you should expect lenders to put your application through extra scrutiny. But, following the above-mentioned steps will help build a strong profile and increase your chances for approval.
The Wise Exchange was created by two sisters in order to facilitate an intellectual dialogue and to offer you resources for financial success. Think of us as a one-stop shop when it comes to your finances and knowledge! If you have any questions, please email thewiseexchange@outlook.com.