It is lovely to be your own boss as it liberates you from the shackles of annoyance by supercilious seniors and situations when you are left holding the bag – at least, you get a sense of freedom. Still, a feeling of accomplishment turns out to be a nightmare when you apply for a mortgage.
Mortgage lenders, according to a new report, have come under the lash for not catering to the needs of self-employed to which they have replied that erratic income accounts for rejection of their applications, of course, no personal interests and grudges.
According to a study conducted by Which?, self-employed is one of the reasons for running a mortgage application. More than 51% of applicants feel difficulty providing a mortgage lender with what they have asked them.
On the one hand, self-employed people are generating work opportunities for others, but on the other hand, they seem to be weaker when they get no support while in need of money.
Everybody knows that you need to do the following things to get an approval for mortgages for self-employed:
- Shopping around for a lower interest rate
- Improving your credit score
- Saving enough for a down payment
But there is a lot you need to consider while applying for a mortgage. The following mistakes you may commit, which result in rejection.
Paperwork is not complete
It is not strange to have a mortgage application cast aside despite high income. You know what you earn yearly, but a lender will not believe you unless you prove it. Mortgages do not act like other short-term loans. You will have to provide paperwork that informs about your assets, savings, and current obligations to prove you can take on a mortgage. It encompasses:
- A quarterly statement of your assets, savings and investment
- Bank statements, tax returns, and another real estate holding
- Residential history of the past two years
- A letter that explicitly states that money is a gift, not a loan (in case you have got down payment as a gift from parents)
Lenders may also ask you to turn in the income statement of the previous two years. Make sure that your documents are up to date. Even a small inaccuracy can turn down your application. You must have proof to prove your current financial situation. Do not try to attempt a hoax to show you well off. Otherwise, you will face dire ramifications.
You mix through business and personal expenses
It would be best if you had a healthy credit score to qualify a mortgage. You must have at least a good credit score. The higher the score, the sooner you will get approved. It shows that you successfully managed to pay back the money. From loans to utility expenses, everything counts to calculate your credit score. An excellent credit score enables you to have a deal with lower interest rates.
Some people use personal credit cards to pay their business expenses because they do not charge as high-interest rates as business cards, but this is a big mistake if you miss payments and carry a large balance every month. It allows for an interpretation that your business is not producing enough income to meet all expenses.
You do not have a blueprint for future income
Much as you earn higher, your chances of getting a mortgage is lower than an employee because they easily prove steady cash inflows. What they earn every month quickly decides the size of mortgage they can afford to take on.
In case of a business, there is no guarantee that if it will grow. A lender will always show interest in knowing the stability of your business. The rule of thumb says that it should be at least two-years-old. Further, you need to show a blueprint for future growth.
Convince your lender that your business will keep generating cash down the line and hence there will be no trouble in making payments. If they doubt that your cash inflows will be interrupted in future, you will not get an approval for a mortgage. Other essential points to bear in mind:
- Your business debt should be as low as possible.
- Do not pay off business debt with personal accounts. Otherwise, it will brutally affect the debt-to-income ratio.
Getting a mortgage for self-employed is quite arduous, but it is not impossible either. As long as you have evidence to prove your income and plans for future growth, you can get a mortgage without hassle. Remember that you should have at least a fair credit score.