More often than not, self-employed people can have a hard time trying to qualify for a home loan due to the fact that they don’t have a stable income. This is why many people in this category opt for a stated income home loan.
If you are self-employed and looking for a home loan, you are likely to find that banks will present you with some strict requirements in order to qualify for the loan. On the other hand, a loan from a stated income lender may be somewhat easier to secure since they typically require less documentation from self-employed borrowers.
If you are interested in what you can do to improve your chances of getting a favorable loan from a stated income mortgage lender, read on as we explore some of the ways you can make yourself a more appealing candidate for a loan, as well as the most popular loan options for the self-employed.
How to Become an Attractive Candidate For a Loan?
Although stated income mortgage lenders may not require all the documentation the bank would before approving your loan, they still want to be reasonably sure that you will be able to pay them back. The more you are able to “convince” them of your ability to afford a loan, the more likely they are to offer you better loan terms.
So what can you do to improve your chances of getting a favorable loan?
Max Out Your Credit Score
Much like with any other type of loan, having a high credit score makes you a more attractive candidate in the eyes of stated income mortgage lenders. Not only does a high credit rating help you secure a loan in the first place, but it can also help you qualify for a lower interest rate.
Prepare Your Documentation
Being able to present the lender with documentation regarding your income in previous years can help you appear a more attractive borrower. Depending on the type of your business, these documents may include tax returns, balance sheets, profit and loss statements, and other documentation pertaining to your income.
Pay Off Your Other Debts
When applying for the mortgage, having few or no other monthly debt liabilities is a good signal to the lender that you will be able to make regular mortgage payments. Additionally, if you have no other debts at the moment, the lender is more likely to be prepared to lend you a larger amount of money.
Provide a Large Down Payment
If you are able to offer a higher amount of equity as down payment, this will reduce the risk for the lender, who will, in turn, be more open to offering better loan terms. Although this is not an option for everyone, apart from helping you get approved for the loan, a large down payment can also save you money in the long run through lower interest rates
Provide Proof of Your Cash Reserves
Another way of assuring the lender that you can afford the loan is by providing proof of significant cash reserves. If you have money available in your account or emergency fund, you will be able to maintain your monthly payments in case of unforeseen circumstances, which means less risk for the lender.
So, what are the options when it comes to loan types?
Bank Statement Loans
This type of mortgage is becoming increasingly popular with self-employed workers, whether they are freelancers or small business owners. Depending on the borrower, to qualify for this type of loan you will need to provide personal or business bank statements either for the past 12 or 24 months.
Since you are providing proof of your monthly income through these bank statements, the borrower is likely to approve your loan even with a downpayment of only 10%, which is the main reason to consider this type of funding.
Asset-based mortgages are another type of loan for which applicants can qualify without having to provide proof of income, which makes them an appealing option for both self-employed and retired people.
In order to qualify for an asset-based mortgage, apart from a slightly higher down payment compared to other types of loans, the applicant needs to provide proof of liquid assets. These can include bank statements, bonds, stocks, mutual funds and 401(k).
Investor Cash Flow Loans
If you are a real estate investor, you can use the rental income from the properties you already own to secure a loan for new investments.
In this type of loan, the monthly cash flow of the borrower is determined through a rental analysis. Although down payment requirements are usually larger, most lenders don’t require any other proof of personal income or employment information.
Although stated income loans have been transformed by the Dodd-Frank Act in 2010, there are still some viable loan options available to self-employed workers.
Which of these options is best for you is your decision to make, and hopefully, some of the points covered in this article will help you with making that decision and negotiating the best terms possible.