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Self-Employed? It May Now Be Easier to Get a Mortgage

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Being self-employed has many benefits. You get to set your own hours, decide what work you want to take on, and operate on your own terms.

But when it comes to getting a mortgage, being self-employed can make things more complicated. To be clear, it's not that self-employment automatically prevents you from borrowing money to buy a home.

Plenty of self-employed people enjoy a steady stream of income, and a generous one at that. But verifying that income is harder for mortgage lenders when self-employed borrowers apply. So sometimes they're stricter with the self-employed than with salaried workers. Such was the case during the pandemic.

Last year, many lenders tightened up borrowing requirements for the self-employed. But last month, mortgage credit availability increased for borrowers on the whole, according to the Mortgage Bankers Association. And much of that growth stemmed from loans given to self-employed applicants.

Why self-employed borrowers make lenders nervous

Many self-employed people don't have the same steady income salaried workers do. And in the absence of steady income, it can be difficult to convince mortgage lenders you can keep up with your home loan payments.

It's common practice for mortgage lenders to thoroughly vet applicants' finances before agreeing to lend them money. For a salaried worker, that generally means submitting the previous year's tax returns and a couple of months of recent pay stubs.

Self-employed people, though, often have to provide a lot more financial information. If you're self-employed, not only might your lender require copies of two years of tax returns, but you may also be asked to provide information such as:

  • Your business' license, balance sheet, and profit and loss statement
  • A letter from an accounting professional stating that you have a viable business
  • Copies of ongoing contracts with clients that prove you have income on the way

Keep in mind that the longer you've been self-employed, the greater your chances of getting approved for a mortgage. New businesses commonly fail, so if yours hasn't been around long, a lender may hesitate to take a chance on you.

You may be thinking, "What if I'm self-employed, but don't have an actual business?" In that case, be prepared to show the above items that apply to you, such as several years of tax returns, a letter from an accountant, and copies of existing contracts.

More leeway for self-employed borrowers

Lenders generally regard self-employed borrowers as more of a risk than borrowers who earn a salary. And during the pandemic, many made it a lot harder for the self-employed to get mortgages. It's encouraging to see that things are opening up. But remember: if you're self-employed and have a variable income, be sure you can keep up with the costs of homeownership.

Take a look at your income history and assess your savings. If your income is such that even your lowest-paid months leave you with enough money to cover your housing costs, then you may feel comfortable moving forward with a home purchase and mortgage application. The same holds true if you have a lot of money stashed away in the bank.

But if you have any doubts, you may want to hold off on buying a home and wait for your income to grow or become more consistent -- even if you're now more likely to qualify for a mortgage than before.

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