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Mortgage applications can vary for self-employed shoppers

Mortgage applications can vary for self-employed shoppers

The mortgage process can be difficult for many people to navigate, but for the self-employed it can be even more of an issue. When shoppers don't earn salaries in the traditional way – that is, simply receiving a paycheck from an employer on a regular basis – financial institutions will often institute some rather stringent income verification requirements that can complicate the mortgage application process.

It's worth noting that from their side of the transaction, it makes sense for lenders to be a little cautious when dealing with mortgage applications from self-employed individuals, according to U.S. News and World Report. They will need to consider how viable that applicant's income is on an ongoing basis – after all, a mortgage typically lasts decades – and at the same time, it can be more difficult for institutions to verify a person's income claims if they are self-employed.

"A W-2 employee usually sees consistent wages from year to year," Scott Scribner, a real estate agent and board member of the National Association for the Self-Employed, told the site. "The self-employed borrower often experiences fluctuations in annual income, which can make it difficult for mortgage lenders to predict future income."

What's needed?
With these issues in mind, would-be homebuyers who are self-employed will typically need to do a little more to make sure their applications are approved, according to Investopedia. In addition to being able to provide more documentation about their finances, it's also wise for those applicants to make sure they have also done more to boost their credit scores (especially by paying down any outstanding credit card balances they may carry) and have the ability to make a sizable down payment.

Furthermore, the longer a person has been self-employed and been able to successfully provide for themselves and their families, the more likely a lender might be to believe the applicant has established a track record of reliability, the report said. Put another way, those who are relatively new to being self-employed may have more trouble getting approval on a mortgage application than someone who has been doing it successfully for years.

There may be some good news
However, it's worth noting that federal laws recently changed to make some aspects of the mortgage application process easier for the self-employed, according to The Mortgage Reports. For instance, applicants may now only be required to provide one year's worth of income documentation instead of one, and income can be calculated differently for business owners who don't draw a direct salary from their own companies.

In addition, those who hold both a standard job, as well as receiving income from other "moonlighting" work they do, will not have to provide proof of the latter as long as their other salaries qualify them for standard debt-to-income ratio calculations and the like, the report said.

As with anything else in the mortgage process, it's often a good idea for self-employed shoppers to do plenty of research and prep work, and keep lines of communication open with lending professionals so they understand everything that's expected of them.

For more information about this article, call 866-614-5959.

Understanding the mortgage process

Understanding the mortgage process

For first-time buyers and especially those who are self-employed, the mortgage process can be a bit of a mystery. There's plenty that goes into it which many first-timers may not consider, and for self-employed people the process can be even more difficult. With that in mind, it's vital to lay the groundwork for a successful application process well in advance.

Before even entering the mortgage process itself, any would-be buyer – regardless of his or her employment situation – must do what they can to build a sizable down payment and improve their credit, according to Freddie Mac. This should include savings in the tens of thousands of dollars (ideally) and credit scores at least in the 700s to ensure maximum eligibility and access to the most affordable terms on a mortgage possible.

For self-employed people this is especially important because lenders are more reticent to extend credit to those without a more reliable income.

Putting it together
Typically, lenders – especially for self-employed applicants – are going to want a lot of financial records dating back years, the report said. While most lenders will have some variation in what they require, documents such as pay stubs or other proof of income, tax forms, proof of monthly expenses and so on are likely to be on the list. Typically, when applicants don't have long histories at their current jobs, lenders may require to them to provide longer-term employment information.

In addition, it's typically a good idea to shop around for a mortgage, checking in about eligibility and affordability with a number of different lenders, well in advance of the actual home shopping process, according to the Homebuying Institute. With pre-approval, the overall homebuying process will go a lot more smoothly, especially in today's ultra-competitive housing market.

With a pre-approval letter, hopeful buyers will be able to determine exactly how much home they can afford, and use that information to make better decisions about how to center their home searches as the spring market heats up.

What comes next?
When buyers have the ability to submit as much documentation as they possibly can about their financial situations, the mortgage and home shopping processes both become much easier to navigate, according to Ruby Home. Lenders will be able to make quick and easy determinations about eligibility – and for how much shoppers can borrow – while also giving sellers more certainty about a bidder's ability to get the mortgage turned around quickly so that they can complete the transaction in a timely manner.

Whenever inexperienced buyers, particularly the self-employed, are are entering the mortgage process, it's important to work with financial and real estate professionals to truly understand everything that will be asked of them and get a better idea of what they'll need to do to even be ready to submit a home loan application. As with many other things in life, a little bit of preparation can go a long way toward ensuring success.

For more information about this article, call 866-614-5959.