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Getting a Mortgage if You’re Self Employed – A Few Tips

In Denver Real Estate, Mortgage Rates | on April, 05, 2014 | by | 0 Comments
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Self Employed - I'm the Boss!With the reduction in the number of employment opportunities that followed the financial meltdown that we are all so very familiar with, thousands of people throughout Colorado State decided to take matters into their own hands and carved out employment opportunities of their own by becoming self-employed. While taking this employment route has proved to be beneficial for many people, it can make it harder to either refinance an existing mortgage or obtain a new one, since the lack of a regular, fixed income makes this group a riskier investment for financial lenders. However, if you are self-employed and looking to work with a real estate agent in Denver on a home purchase, that doesn’t mean to say you won’t be able to get a mortgage; it just means you’ll most probably have to make more of an effort.

I’m Self Employed: How Can I Get Approved for a Mortgage Loan?

While it’s undeniable that as a self-employed worker you will find it harder to get approved for a mortgage loan, you can take comfort from the fact that every mortgage applicant now finds the process a lot more difficult. It’s important to point out that if you have been self-employed for less than two years, you won’t be able to get a mortgage no matter what you do, since all lenders want to see at least two years of filed tax returns. If you do tick that particular box, you can make yourself a more attractive applicant by taking note of the following tips.

Take Care of Your Credit Rating

A person’s credit rating is considered an important factor in determining the strength of any mortgage application. This information helps the lender to assess how likely you are to repay any money that you borrow based on your past record. As previously mentioned, many financial lenders consider the self-employed to be higher risk than applicants that receive regular paychecks, meaning the higher your credit rating, the better. If you aren’t sure what your credit rating is, make sure you find out before you start contacting mortgage lenders and making enquiries, and if it’s lower than it should be, take measures to improve it. As a leading real estate company in Denver, we can provide you with advice that will help you to achieve this.

Avoid Reducing Your Income

When self-employed individuals file their annual tax return it’s common practice to claim any legitimate expenses that they can. However, you have to be aware that this reduces your income “on paper” which is the amount that all prospective lenders will see. Depending on your level of income and the amount these expenses reduce it by, this could have a significant impact on your mortgage application, reducing the amount the lender is prepared to let you borrow or making you illegible altogether. If your last tax return was filled more than a quarter ago, you will likely be asked to support your application with a year-to-date profit and loss statement.

Make Sure You Have a Low Debt-to-Income Ratio

It doesn’t matter whether you have an outstanding credit rating, can prove you have a stable income and you always pay your bills promptly, if lenders find that you live close to the edge of the “financial” cliff it might not matter. Lenders will measure how “dangerously” you live by using what is known as the debt-to-income ratio, which compares your monthly expenses plus any debt repayments that you have to make against your monthly income. Generally speaking lenders don’t like this to be any higher than 40 percent, especially if you are self-employed. Take steps to lower your percentage as much as you can simply by cutting out unnecessary expenses.

Do You Have Any Assets?

If you are looking to refinance your current loan, the deal you are offered will be influenced heavily by the amount of home equity you possess, and if the value of your home has plummeted since the market crashed and you now find yourself “underwater” financially speaking, most mortgage advisers will tell you to consider what’s known as a cash-in mortgage refinance. However, if you’re a self-employed worker that is looking to buy, without doubt one of the best ways to improve your chances of getting approved for a mortgage is to make the biggest down payment that you possibly can, as this reduces the amount, and consequently the risk, that the lender has to give you.

Make Sure You’ve Got Some Extra Funds in the Bank

Many financial lenders like you to have what’s known as “reserves.” This is simply extra cash that you have in the bank to tide you over just in case you’re earnings take a dip for a month or two (which is something that lenders expect to happen when you are self-employed). This provides you with a “safety net” and ensures the lender that you will be financially capable of “riding out” any tough periods that you experience.

The truth is, regardless of whether you’re self-employed or not, if you have a good credit score, a low debt-to-income ratio and a reliable income source, you represent an attractive investment for any financial lender. For more advice about buying real estate in Colorado, contact us today.

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