As a self-employed person or freelancer, things work a little differently when you want to access mortgage loans. It can get frustrating, especially when you have enough funds to pay the deposit and your business or freelance job can sustain the repayments.
In most cases, you'll find that you tick all the necessary boxes except that you don't fall into the category of a standard income. What can you do to qualify for mortgage loans? Here are tips to help you prepare.
Proof of Income
Lenders need to know that you're earning an income and how much you make. You'll need to provide proof that your business is generating a stable income. The lender will need to see your tax returns for the last few years.
This will help give them an idea of how your business is fairing. Are you running your business at a profit or loss? Is the income fluctuating, increasing, or stable? If your income has been declining for the last few years, you'll likely have a harder time convincing the lenders that you can keep up repayments.
Pay a Higher Down Payment
Save up enough to pay a higher down payment for the mortgage loan. Some lenders can agree to a 3% down payment, but higher interest rates often accompany it. If you can, pay a higher down payment as it can help reduce your risk level. However, this only works if you meet all other loan requirements. If you don't, the lender will likely turn down your loan request.
A significant down payment assures the lender that you can save, and you're invested in acquiring a home.
Accumulate Cash Reserves or an Emergency Fund
Most businesses are reliant on regular clients that patronize them. If they lose these clients, the businesses might struggle to pay bills, salaries, and even loans. Work can dry up at any time, and lenders understand this, which is why some ask to see your cash reserves.
The lender may need to know that you can keep up payments even when work dries up for several months. It may not be a requirement for many, but it will help improve your odds.
Lower Your Debt-To-Income Ratio (DTI)
What percentage of your monthly income goes towards paying debts? Is it over 50%? If yes, consider lowering it to 43% or lower before you apply for any mortgage loans. These debts include credit cards, car loans, and student debts.
The 43% debt-to-income ratio is still on the higher side for self-employed people and freelancers. Therefore, you might want to pay up some debts to help lower the DTI to a more favorable percentage.