Self-Employed Loan Program: How to Qualify for These Excellent Loans
According to Oberlo, citing information from the Bureau of Labor Statistics, nearly 10 million Americans are self-employed. These people enjoy an assortment of benefits from their careers, including flexible hours, greater independence, and the chance to work in a field that fits their passion and skills.
Self-employment is rewarding. But it certainly has challenges. Finding a niche, building a business, creating a base of customers, and maintaining annual profits can be extremely difficult, even in the best of times.
One of the challenges, although far smaller than actually running the business, is getting a home loan. Many self-employed professionals face roadblocks when they apply for a home loan. They don’t have the same documents as traditional employees, which creates complications.
However, with a little information and a bit of preparation, most self-employed individuals can get the loan they need.
Self-Employed Loan Program: What Are Your Options?
FHA, USDA, VA, and Other Government-Supported Loans
The United States government has recognized stable homeownership as one of the most important pillars for personal finance and the relative economic strength of our nation. Through a variety of agencies, they have supported home purchases by guaranteeing loans, which basically means they promise to repay lenders some or all of a loan if it goes into default.
The big three agencies in the real estate sector are the FHA, USDA, and VA. These are eligible for self-employed borrowers, although rigid qualification standards can make securing the loan difficult.
A conventional loan is a mortgage that is not supported by the government, which means the lender is taking a bit more risk. (If the loan falls through, the government is not there to pay back some or all of the financing.)
These loan options can be useful, but there is one important loan type that is popular among self-employed professionals…
Bank Statement Loan
This is not exactly a loan product (like an FHA loan, for example), but more of a process for approving a borrower. With this process, the aspiring homeowner does not need to provide proof of income with paystubs or tax returns. Instead, the borrower delivers one or two years’ worth of bank-statement information, giving the lender a strong sense of income and expenses.
If you do not have income tax returns or other verifiable proof of income, a bank statement loan is a useful option. This self-employed loan program allows you to use unconventional and unique documents to qualify.
Overcoming the Challenges: What Lenders Like to See
Whether you are applying for a loan based on bank statements, or you are using a conventional loan that uses tax returns and other “typical” financial information, here are some of the things lenders like to see when approving your loan.
What Do You Need When Applying for a Home Loan?
Self-employed loan programs are, by and large, similar to other mortgages for traditional employees. You’ll need to demonstrate a solid income, responsibility with debt, a manageable debt load, and other factors that help lenders approve the loan. The means of achieving this, however, can be slightly different.
To apply for a self-employed loan program, you’ll likely need a list of current debts and monthly payments, which should include how much you pay every month, as well as the total debt obligation.
Although they may not form the foundation of the loan, you’ll likely need to submit tax returns. Your lender will look at your overall business income, and you may need at least two years of tax returns.
If you go with a bank-statement loan, you’ll need to provide up to 24 months of bank-statement information. Even if these are not used to verify your income, they can provide useful information and context to the lender.
Your lender may also request a declaration of assets, proof of your current house payment (rent or mortgage) or additional sources of income.
The lender could also request that you fill out several forms and documents that may only be used for self-employed loan programs. The IRS form 4506-T, for example, may be requested. This form gives lenders permission to access transcripts of your tax returns.
Steady, Stable Income
Lenders want to know that your income is strong, steady, and reliable. They want to see that your business is performing well, that you have a steady stream of clients or customers, and that your future income is expected to grow. They not only want to see that incomes are steady, but that the business will continue to climb upward.
Lenders, for the most part, look at the big picture. You probably don’t need to worry about a few bad months if you’re a business owner seeking home loan, as long as your overall income is steady.
Large Downpayment and Savings
To qualify for a self-employed loan program, you probably don’t need to put down 20%. But being able to deliver a strong downpayment will improve your chances of mortgage approval. Not only does a downpayment lower the amount you are borrowing, it shows lenders that you are responsible with money and can handle your finances.
Money in the bank serves much of the same purpose. Having cash in the bank shows lenders that, in case of a financial emergency, you can still make the mortgage payments. A strong amount of savings, in many ways, is most important to lenders.
Strong Net Business Income
There are numerous statistics and figures that lenders go over when considering an application for a self-employed loan program. They may look at business revenue, but this only takes into account what a business brings in, not what they spend. A better figure is the net business income or profits, which helps a lender understand the amount you bring in after subtracting expenses.
Using net business income compared to revenue may result in a smaller loan, but it will also result in a more manageable loan payment.
For more information on getting a loan when you are self-employed, check out our article titled “Home Loans for Self-Employed: 7 Simple Tips for Securing Your Mortgage.”
Dedicated Support When You Apply for a Self-Employed Loan Program
Are you ready to apply for a self-employed loan program? Contact our team today and let us help you find the right mortgage for your unique needs. Whether a bank-statement loan or an FHA loan is right for you, we’ll be here to provide the support and guidance you deserve!