According to the United States Department of Labor, approximately 10,507,000 Americans are self-employed, with about 1 million more reporting self-employment as a secondary source of income. With the current economic climate, self-employment has boomed, rising along with corporate down sizing and telecommuting capabilities. While many mortgage lenders are aware of the increase in self-employed loan candidates, they still consider them to be higher risk borrowers.
Some Things You Might Encounter As A Self-Employed Borrower:
Higher Interest Rates
Reduced Ability To Negotiate
Higher Down Payment Requirement
More Paperwork
As someone who is self-employed, mortgage lenders may see you as a less-attractive loan candidate. Expect to be quoted higher interest rates than what you might see on the company's website or advertisement. Those rates are typically for people who are considered ideal borrowers due to verifiable incomes and excellent credit scores.
Lenders may also want to see a lower loan-to-value ratio, which will require a larger down payment. As for the extra paperwork, you won't be able to provide your lender with W2s for the past couple years like traditionally-employed borrowers. Instead, you'll need to provide things like tax returns from the previous year, a current business license, a letter from your accountant, and financial statements showing the income and value of your business.
If possible work with a mortgage consultant who has experience originating loans for self-employed home buyers. He or she will know the right questions to ask and documentation to ask for up front, avoiding frustrating and costly delays down the road.
Applying for a joint mortgage with a traditional W2 employee such as a spouse or significant other, is one way of improving your chances of getting a mortgage with a lower interest rate. It's a good idea to do whatever you can to make yourself a more attractive loan applicant. Improving your credit score, offering a larger down payment and being willing to provide documentation can make you appear as less of a risk to mortgage lenders. It is important to understand that most lenders will want to see that you have at least a two year history of working as a self employed individual in your industry.
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