Throughout the United States, more and more Americans are choosing to become self-employed rather than working for someone else. While there are many advantages of taking charge and becoming your own boss, there are also many drawbacks. Perhaps one of the most noteworthy disadvantages of becoming self-employed is trying to obtain a mortgage. While the steps associated with this process can be slightly more difficult when compared to a traditionally-employed individual, it’s not impossible.
What to Expect When Obtaining a Mortgage
Perhaps one of the most common elements you should expect when it comes to securing a mortgage when you’re self-employed boils down to interest rates. You should expect to pay a higher interest rate than someone who features a traditional job. In general, if you see an advertised rate, you should expect to pay a higher rate. These advertised rates are generally meant for borrowers who have verifiable, regular income ñ as well as super ideal credit scores. Because you may be a less attractive borrower, you may have to spend a decent amount of time shopping around for a mortgage lender and negotiating terms. Be prepared to demonstrate your financial security and ability to pay by providing several years worth of financial documentation.
Mortgage Options for Self-Employed Individuals
Although obtaining a mortgage when you’re self-employed can be slightly more difficult, it’s not impossible. In order to increase the likelihood of securing a mortgage loan, you must be prepared to think outside of the box and seek out a mortgage from unlikely sources. Some of the most common mortgages for those who are self-employed include:
Stated Income/Stated Asset Mortgage: This type of mortgage is primarily based upon what you tell the financial institution what your income is. Unlike a traditional mortgage, the bank won’t actually verify this income. These are also called low-documentation loans. If you choose to go this route, be prepared to provide the banking institution with a variety of documentation such as invoices and other paperwork that proves your cash flow. You may also be required to showcase your recent tax returns.
Alt-A Mortgage: This type of mortgage may be your ideal choice if your tax returns display a significant business loss or little profits. Because financial institutions take on a significant risk when it comes to lending to those with unverified income, you should expect to pay a high interest rate throughout the duration of your loan. These loans generally land between subprime and prime loans when it comes to interest rates. The reason for this is because you’re considered a more risky investment than someone who has a traditional job with more solid income verification.