People with income from an employer can be easily approved for a home mortgage loan; however, those who are self-employed might have a more difficult time. Regardless of your income level, federal regulations are making it hard for the self-employed to get approved. These regulations will not make it impossible to finance a home loan, but you will have to think outside the box to get that mortgage.
New Federal Rules
When the real estate bubble busted in 2008, the federal government took a hard look at the practices of the mortgage industry. In the years that followed, many consumers found it hard to get approved for home financing. In 2014, the Consumer Financial Protection Bureau created new standards for “qualified mortgages,” and these requirements become harder for those who don’t work a traditional job.
If you want to qualify for these mortgages, you need to have verifiable income. While a large bank account isn’t bad, it also isn’t enough. You must prove that you have a steady income. Your debt-to-income ratio cannot exceed 43%. For the self-employed, you also need to produce two years of business and personal tax returns. If you are using tax write-offs to reduce your taxes, it can lead to cutting the amount of your income. That income is significant when applying for a home mortgage. Finally, you need to have a credit score of 640 or higher for an FHA loan.
These requirements can make it challenging to find a mortgage lender for business owners and the self-employed, even if you have a large savings account.
Traditional Property Financing Alternatives
While it might seem like the cards are stacked against you, there are some alternative ways to finance a home loan.
Assistance From Family Members
It might not seem like an ideal situation, but some self-employed individuals can ask family members for loans or to co-sign the paperwork. If you are just starting out with your independent business, you might not have enough verifiable income to secure a qualified mortgage loan. However, a family member with a reliable income can co-sign a loan with you. The property will still belong to you, and you must also make all the payments. However, your co-signer is guaranteeing the loan. In some cases, you may be able to refinance the property into your name only.
With some properties, the seller offers its own financing. These sellers often do this because the area’s market is weak, or they want an income stream. In any case, the loan terms are written on a promissory note. You will make your monthly payments directly to the seller. While these loans often have a high-interest rate, they do cut through all the red tape and fees with traditional mortgages. You might have to convince the seller that you are a qualified candidate to buy their property. A significant down payment and a stable revenue stream could be enough to secure this type of financing.
Rent-to-own properties are another excellent choice for the self-employed. If you need to wait two years for income proof, you might be better off with this option. You will sign a lease and pay rent like a traditional rental property.
In most cases, the rent is higher, and that extra money will go into an account that builds a down payment. At the end of the lease term, you can use the down payment and purchase the property. In the end, if you don’t want to buy the property, all of the extra money will stay with the landlord. This option is a great way to build up your down payment as you repair your credit or other financial issues.
Investment Accounts or Insurance Policies
If you have an insurance policy or retirement account, you might be able to borrow on them. However, you should think carefully about this option since there is more risk involved in the transaction. You can lose out on earnings as you put all your money into a home loan. Some of these accounts include:
A whole life or universal life policy might be able to borrow against its cash value. When you pay into the policy, the cash is building interest and dividends. You can borrow the money without any questions. However, you will have to pay back the money like any other loan. If the unthinkable happens, your family might be left with a lower payout. You also want to talk to your insurance company before choosing this option.
An IRA is another way to borrow money. There are taxes and penalties for those who withdraw money and are not at a certain age. However, if you have contributed less than $10,000 to the Roth IRA, you can take out $10,000 without any penalties for the purchase of a first home.
If you choose to borrow against a 401K, it can be a risky option. You should only consider this option if you have run out of other avenues. You can only get cash up to half the account’s value and a maximum of $50,000. You will pay interest payments on the loan to yourself, and the interest rate can fluctuate.
Find Non-Qualified Mortgage Products
If you can prove that you are a low-risk candidate, you might be able to secure a “qualified mortgage.” However, you can also try your hand at interest-only loans, payment option loans, and no-documentation loans. Those borrowers with excellent credit and a sizeable down payment can find these types of mortgage products, but you could be paying a higher interest rate than a traditional loan.
You don’t have to get stuck renting because you are self-employed. If you need to take two years to prove your income, then you can use that time to make yourself a better candidate for a loan. You can build up your down payment and boost that credit score. By doing this, you can get qualified for the best products on the market.
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