If you are self-employed, it can be harder to get the banks to lend to you for a home mortgage. While it can help that you have a high credit score and your own profitable business, having your application accepted is not a sure thing. Banks simply don’t feel that the self-employed have a secure income that they can believe in. If you’re self-employed and need to apply for a mortgage, here are tips on how to present yourself to the banks as a sound financial bet.
Don’t write off too many expenses on your tax returns
If you’re a self-employed worker and you plan to apply for a mortgage, you should start preparing your tax returns differently a couple of years prior. The most important thing that you can do is to cut down on the number of tax deductions that you claim.
There is a good reason why you should do this. When you fill out a mortgage application form, you only get to put down your income as it appears after all the expenses and deductions on your tax return. If you deduct expenses from your income, your income will appear far lower than it actually is. The lower your income, the lower are the chances that the bank will lend to you. Fewer expenses deducted may mean that you pay more in taxes, but you will improve your chances of getting your mortgage.
Don’t owe very much
The bank counts every loan that you hold. If you owe a few thousand on your student loan, for example, that’s debt that you hold. The more the existing debt that you hold, the greater the chances that the bank won’t see you as eligible for more debt. Banks consider the ratio of your debt to the income that you make as an important indicator of the financial viability of your mortgage. If there’s too much debt for a given level of income, they turn you down. If the bank rejects you for student loans, credit cards or other loans, your only hope is to pay them off, perhaps dipping into your savings for it.
Keep careful records
Employees making a salary only need to show W-2 forms in order to apply for a mortgage. If you’re self-employed, however, you need to show a number of different documents. You’ll need to bring personal and business tax returns, 1099 forms, K-1 forms, Schedule C forms, bank statements, and business balance sheets. All this is in addition to W-2 forms for the salary that your business pays you. Receipts and contractor agreements can help, as well. All of this can help the bank see how much money you’re making. The more the records you show, the better your chances are.
Keep your business and personal finances separate
When a bank evaluates your mortgage application, they only look at your existing personal debt to make sure that your application is financially viable. This means that if you do not have separate accounts for your business and your own life, the bank is likely to count your business debt as your own. If you maintain separate accounts, however, your business debt won’t appear on your personal account. You will have a smaller level of debt to show, something that will improve your chances with your mortgage application.
Make as large a down payment as possible
When you make a large down payment, you improve your chances of having your application accepted. This is because a large down payment lowers the amount that you need to borrow, and gives your application the appearance of greater financial stability. Every little step that you take counts.
When you run your own business, the banks do hesitate to lend to you. With preparation in a few areas, however, you should be able to get through the process without trouble. 7 Steps to Take When You are Turned Down for a Mortgage
Not every mortgage application made receives lender approval. Applicants may find themselves denied a loan when they switch careers a short time before applying, or when they take on a car loan around the time they apply.
Homebuyers, once they are turned down for a mortgage, often have no idea what to do next. If you find yourself in this position you need to know what to do to be successful the next time you apply. What follows are ideas for steps that you can take to be sure that you are able to win mortgage approval before long.
Find out more about the reasons you were turned down
When you receive a declination letter from a lender, you need to take steps to find out what went wrong. If your application was to a major mortgage company, finding out why you were rejected should be straightforward. Usually it’s because the lender believes that you don’t have enough for a down payment and closing costs because you have too much debt elsewhere, or that you have poor credit. It can help to visit the lending branch that you applied to and inquire about their reasons. Then you’ll be in a better position to put in a stronger application in the future.
Find out if you could apply to other mortgage programs
Lenders tend to offer different kinds of mortgage products for different kinds of homebuyers. There are products specifically meant for people who hold high levels pre-existing debt, for people with low credit scores, and people with only small sums put by for their down payments.
It can help to ask the lender if applying under one of these programs is more likely to win you approval. If your lender doesn’t offer such mortgage programs, you should look for a lender who does. It’s important to consider going with a local lender, because national lenders often have little idea how the real estate market operates in a specific town or state. A local lender is likely to have programs that are specifically designed for your location, and you’re more likely to win approval under them.
Make sure that you are on time with your monthly bills
When you don’t have an impressive credit score to show, many lenders are open to considering alternative methods of determining your creditworthiness. For instance, they may use proof of timely rental, utility and car payments each month, as indicators of financial stability. If your credit score is less than stellar, it’s a good idea to try to make reliable payments each month to demonstrate financial responsibility.
Be careful to not use too much of the credit available to you
As you work toward improving your chances of approval after being turned down, it’s important to not forget to monitor your credit utilization. It’s easy to figure out what your credit utilization is. All you need to do is to add up the credit limits on all your credit cards, add how much you owe on all of them, and work out the ratio between them. If you have a limit of $20,000 on all your cards put together, for example, and you’ve spent $10,000 on all of them, you have a credit utilization ratio of 50 percent. Keeping your credit utilization under 10 percent ($2,000 in this case) is ideal.
Save for a bigger down payment
When people are turned down for a mortgage, they tend to feel that they no longer have a reason to save money anymore. It’s important to realize, however, that a large down payment makes you a tempting lending customer. When you’re ready to put down a sizable chunk of your own money, you become an attractive borrower. It’s important to continue to work hard at saving as much as you can to put toward your down payment. The size of your down payment could win you approval the next time you apply.
Keep your spirits up
If a mortgage lender sends you a note of rejection, it’s no reason to be hard on yourself. Plenty of people receive mortgage rejection letters, but go on to prepare, work hard, and win approval at some point. You need to make sure that you don’t lose heart, that you continue to believe in yourself, and attempt to make a more attractive mortgage customer. If you do this, you will win approval for a mortgage, one day.
4 Steps to Preparing Yourself for Home Ownership
Owning property is something that the majority of Australians aspire to. But if you’re not on the ladder yet, you’ll be all too aware of the growing difficulties that first-home buyers are facing.
Increasing property prices, sluggish wage growth, and tighter lending regulations certainly aren’t helping, but that doesn’t mean you should give up hope.
Home ownership is not something that happens by chance, though. You need to prepare yourself financially, and it helps to have a decent understanding of how the process works. So, if you’re hoping to buy a property of your own, but you don’t feel ready quite yet, this guide will help you get better prepared for when the time comes.
Step 1: Getting your finances in orderIf there’s one thing you’re guaranteed to need in order to buy a home, it’s money. So, however far away that purchase is, it’s never to early to start sorting out your finances. At a basic level, this just means focusing on paying off your existing debt and saving for a deposit – both things that will put you in a stronger position when it comes to securing a loan.
But it’s not just a deposit you’ll need to fork out for. There are all kinds of other costs to cover when you buy a home.
• Stamp duty (unless you’re exempt)
• Loan arrangement
• Lender’s mortgage insurance (if your deposit is under 20%)
• Property insurance
• Removals In Victoria and NSW, stamp duty concessions were introduced in 2017 to make life that bit easier for first-time buyers. If you’re in one of these states, check whether you qualify. Otherwise, there may still be various grants you can apply for to lighten the burden.
Get an idea of how much these fees will add up to, so you can adjust your savings target accordingly.
It’s also a good idea to check your credit score at this stage for accuracy. Occasionally mistakes occur, and it can take a while to have these rectified and your record corrected. In the meantime, you might find it difficult to secure a loan. You can request a free copy of your credit record once a year from any of the main providers.
Step 2: Searching for a home loanThe next step is to research the mortgage market. Again, you can start doing this well before you buy as it will help you understand how much you can afford to borrow and how much of a deposit you’ll need.
Some loans will let you have a deposit as low as 5-10 percent of the purchase price, but it’s a good idea to save 20 percent if you can (this means a loan-to-value ratio or ‘LVR’ of 80 percent). This is because with anything lower than this you’ll have to pay lender’s mortgage insurance (LMI).
The purpose of LMI is to protect the lender if you default on the loan (it’s of no further benefit to you, but you have to foot the bill). Depending on your loan size and LVR it can be anything from a few thousand dollars to over five figures. Your lender may offer you the option to roll LMI into your loan – meaning you don’t have to pay anything extra up-front – but this does mean you’ll be paying interest on it for the full term of your loan. Do the sums and see if it’s really worth it.
You’ll also need to decide between a fixed and variable rate mortgage. Variable rates can change at any time, usually tracking the RBA cash rate, whereas fixed rates are set for a certain number of years. A mortgage broker can help you find the best product for your circumstances.
Once you’ve decided on a mortgage, it can be a good idea to get pre-approval. Although still subject to a few conditions, this is basically a loan agreement in principle. It gives you confirmation of what your borrowing limits are, and can also be a helpful bargaining tool for negotiations.
Step 3: House-huntingNow it’s time for the fun bit! No doubt you’ve already had a peek at the market, but with your finances and pre-approval sorted your search can begin in earnest.
It’s a good idea to write a list of requirements for your property, split into must-haves and nice-to-haves. Having this to refer to later on can help you avoid getting carried away in the excitement of finding a place you like. If you’re buying with your spouse or partner, this becomes more complicated!
Step 4: CompletionOnce you have found a home you love, there are still a few hurdles to jump.
First of all, you should get a building and pest inspection to make sure there are no hidden surprises. Yes, it’s another cost you could do without, but it could save you thousands of dollars in the long run. If the inspection does uncover problems, but you still want to buy the place, you may be able to use these to negotiate a lower price.
Then, you’re ready to put in an offer. Negotiating for a home is a nail-biting process, so you might consider getting a professional to negotiate on your behalf.
Once your offer is accepted, it’s time for settlement. A lot of the legal and financial details will be handled by your solicitor and bank; all you can do is wait. Depending on the type of property, you might need to arrange insurance before your loan can be approved.
And then, finally, it’s time to pick up your keys and enjoy your new home!
There’s a lot to think about, but being prepared and having the right people working alongside you can make things run that bit smoother on the journey to home ownership.