Regardless of your income type, there are ways to strengthen your qualifications for various types of mortgages.
1. Be prepared to open your books
Make your loan process easier by gathering your documents ahead of time. You can usually expect to need two years of taxes (business and personal) and, potentially, a profit and loss statement for your business. If you have any 1099s from contracting work, your lender may want copies.
2. Reduce your debt-to-income ratio
Your debt-to-income ratio is how much of your monthly income goes toward debt payments, and it’s an important consideration for lenders. It tells them how much you can comfortably afford to spend each month on a mortgage.
The exact DTI you need varies by loan program, but generally speaking, the lower your DTI, the easier it will be to qualify. Additionally, a higher DTI will usually mean a higher interest rate, as it makes you a riskier borrower in the lender’s eyes. To improve your chances, work on lowering your DTI. You can do this by paying down debts or increasing your income.
3. Improve your credit
Your credit is another big factor for lenders. Again, the minimum score you’ll need varies by loan program and lender. Higher scores mean lower interest rates, which can save you money in the long run.
You should also pull your credit report. If you find any errors, dispute them with the credit bureau. Other ways to improve your score include paying down debt, increasing your credit limit, and making consistent on-time payments.
4. Make a larger down payment
While it’s not possible for everyone, making a larger down payment is another strategy to consider. When you make a bigger down payment, you reduce the amount of money you need to borrow. Ideally, you should aim for at least a 20% down payment, as this will allow you to avoid mortgage insurance, which makes your monthly payment more expensive.
5. Get a mortgage preapproval
It’s always smart to get preapproval for a mortgage before shopping for a home — but it’s particularly important for self-employed people. For one, it gives you an idea of what price range you should be shopping in. It also shows sellers that you’re likely to be approved for a loan and go through with the deal.
6. Consider a joint mortgage
If including a spouse or partner on your mortgage is an option, that might be a route to explore, too. First, it adds more income to your application, which is critical if you’ve taken many tax deductions and have a low taxable income. Additionally, if your partner has a salaried, W-2 income, it can also lower your risk. It shows lenders you have stable, consistent income with which to pay your mortgage.
7. Think before filing your taxes
Finally, if you regularly take self-employed tax deductions on your annual returns, think carefully before next year’s filing day. Skipping some of those deductions might help you more easily qualify for a loan and buy a house.
