Get your mortgage approved even when you are self-employed
Having a good credit rating and a faster mortgage loan approval
Mortgages for self-employed
Mortgages for self-employed individuals are indeed more difficult to obtain especially when compared to individuals working for an employer. It is, however, achievable if you have good financial record keeping and can proof that your business model is successful.
Your credit rating is of utmost importance as it will reflect how well you repay your current liabilities. A good credit rating will also make you a lower risk and you will benefit from better interest rates charged to your mortgage loan. Credit acts are also in place to ensure that financial institutions do not allow mortgages for the self-employed individuals if they cannot afford it or do not have enough assets as security, and therefore owners are required to declare their expenses as well.
Quite often mortgages for self-employed individuals require a higher down payment deposit to alleviate the risk the financial institution will take in providing the loan, and individuals could expect to pay a 20-30% down payment deposit.
Types of Mortgages for Self-employed Individuals
Depending on the financial institution there are normally a variety of different mortgages for self-employed individuals including low- and no doc loans. Each loan type has specific rates, down payments, document requirements and credit checks attached to it. Common loans are:
Employment verification loans are subject to credit score, asset confirmation and employment verification. Income is only stated on the application, but assets are verified to confirm if the information supplied is consistent.
Zero ratio loans are subject to credit score, proof of significant income, asset verification and employment history. Due to the accounting practices and underwriting requirements of the financial institution, the calculation of the applicant’s debt-to- income ratio might be too high for a conventional loan even though sufficient income can is available. No debt-to-income ratios are calculated for approval of this loan type if sufficient proof of income can be provided.
No asset/No income loans are subject to credit score and employment history of the applicant, and could have restrictions on the property type and LTV (Loan to Value).
No doc loan approval is only subject to calculation of the credit score and LTV of the property, but will require a hefty down payment when purchasing a property, and in the case of mortgage refinancing, considerable equity in the property needs to exist. This type of loan is also generally more expensive.
Mortgages for self-employed individuals will require documentation subject to the type of loan applied for, but commonly include:
- Identification Document (ID)
- Utility bills for the last 4 months
- Business registration/license number
- Income tax returns for the last 2 years
- Total earnings/gross profit letter from an accountant (for last 12 months)
- Profit and loss statements
- Balance sheet
- Bank account statements for at least 12 months
- Utility bills for the last 4 months
(Tip: Always make copies should the documents get lost)
Should you wish to purchase a property in partnership, and assuming the partner is also self-employed, the same documentation will be required for the partner.
Tips for Self-employed Individuals
Tip 1 – Contact a mortgage underwriter
It is often better to speak to a mortgage underwriter or loan officer face to face when applying for your loan. You may use online facilities and loan assessment sites but this might not yield the best results as mortgages for self-employed individuals are more complicated.
Tip 2 – Get your documents in order
More documents are required for mortgages for self-employed individuals and where fully employed individuals only have to provide three month’s bank statements, self-employed individuals will have to provide statements for at least six months, but quite often up to two years.
Tip 3 – Proof of rental history
If you do pay rent for housing, also supply proof of payments thereof as it can help to obtain a mortgage for self-employed individuals.
Tip 4 – Proof of earnings
Ensure you provide all income received to the financial institution, and if this income is not reflected on your bank statements, make sure you provide this additional information as well.
Tip 5 - Follow up
Ensure you follow up regularly with your mortgage underwriter. They deal with thousands of applications and even though you are an important client delays might be experienced.
Mortgages for self-employed individuals need not be so difficult to obtain especially if you have sufficient financial records and a good credit rating. Individuals seeking more information regarding mortgages for self-employed individuals may click on the links below.