Self-Employed Loans: Unlock Your Financing Potential
What is a Self-Employed Loan?
When you are in the market for a new home, you probably also want a mortgage loan. Mortgage loans make it possible for buyers to afford the prices of houses by borrowing money from lenders and agreeing to pay it back with interest. The problem is that many conventional lenders have high standards for mortgage qualifications. As a result, they have strict criteria for income verification, credit scores, down payments, debt-to-income ratios, and more.
Some borrowers may be perfectly financially stable, but conventional lenders reject them because they do not meet some criteria. This is especially true for self-employed borrowers. Freelancers, business owners, and contractors do not generate income like employees do, so applying for a traditional loan may not work to secure a home. Fortunately, self-employed mortgage loans allow these individuals to borrow money and pay for their homes.
How to Qualify for a Self-Employed Loan
As with any personal loan or conventional home loan, you must meet the lender's qualifications to apply for a self-employed mortgage loan. The criteria will depend on the individual lender, but you should expect to see requirements for a minimum credit score, minimum loan down payment, and maximum debt-to-income ratio. Some lenders will be flexible with these criteria if your personal finance situation is stable in other areas.
For example, the financial institution may accept a lower credit score than usual requirements if you have a lower DTI or can pay a larger down payment.
Essential Documentation Needed
Since many of these unsecured loans use alternative sources for proof of income, you must provide documentation when applying for a self-employed mortgage or personal loan. Potential documents for proof of income include a credit report, tax returns, financial statements, tax statements, bank statements, pay stubs, and profit-and-loss statements.
Anything that can demonstrate to the lender you have financial stability will be helpful for the approval process.
Benefits of Self-Employed Loans
If you do not receive a consistent paycheck because you are self-employed, it makes sense to seek other financing options. Whether a company gives out personal, business, or mortgage loans, its priority is limiting risk, including shifting incomes. A conventional mortgage lender may hesitate when they look at your changing finances, so a self-employed mortgage loan may be the only option.
Here are some benefits of these personal loan products for freelancers, business owners, and contractors.
Flexible Income Verification
A regular paycheck is usually a sign of stable income. However, your pay does not always come this way if you own a business or are a contractor. Since most conventional lenders will use paychecks as their primary income verification method, you may be unable to finance your home with these products. A self-employed borrower can seek alternative personal loan products because they offer flexible income verification strategies to accommodate diverse income streams.
For example, the lender may examine profit-and-loss statements or bank statements to verify that you make enough money to cover monthly payments.
Tailored Loan Options
Most conventional loans have similar terms, though there could be variations, like adjustable rates versus fixed rates. Self-employed individuals can find personal loan programs that offer greater flexibility. Online lenders often work with self-employed people to build a tailored loan product that meets their needs.
Features that could meet the needs of self-employed loan applicants include interest-only payment schedules, higher down payments, and lower monthly premiums.
Types of Self-Employed Loans
Whether you take out personal loans, business loans, or home loans, all lenders care about is if you can pay interest on what is owed in a timely fashion. As such, lenders, credit unions, and banks that give out unsecured or secured loans to self-employed borrowers will adjust their products to fit each homebuyer. Here are a few loan options depending on your credit history, debt annual income, employment status, and financial health.
Stated Income and Bank Statement Loans
Many lenders offer stated income loans or bank statement loans for self-employed applicants. A stated income loan is when a borrower writes their self-employment income on the loan application. The lender takes them at their word during the underwriting process instead of requiring proof of income. Borrowers will not have to provide the typical income verification documents, such as pay stubs, W-2s, or tax returns, to apply for these loans.
Bank statement loans are another alternative for those with self-employment income, such as property investors, small business owners, or freelancers. With this loan, the lender will search the past 12-24 months of bank statements, personal and business expenses, and profit-and-loss statements. Though it is better to keep business expenses and personal expenses separate as a business owner, it may not hurt your chances of loan approval if you can prove consistent income.
FHA and Conventional Loans for Self-Employed Individuals
Even if you operate your own business and your taxable income is somewhat inconsistent, you can still qualify for other home loan products. Federal Housing Administration (FHA) loans are a viable option if you don’t have a strong credit score or you have inconsistent income. Typically, you need a fair credit score of 580 or more to qualify, but multiple lenders could make exceptions.
Self-Employed Loan vs. Traditional Loan
Each offers unique advantages if you can qualify for both self-employed and traditional home loans. Self-employed loans may have lower monthly costs, especially if you choose interest-only payments initially. Additionally, they have more flexible qualification criteria, so it may be easier to be eligible for them if your net income changes. However, the upfront costs could be higher, and you may pay a higher interest rate, resulting in a higher total loan cost.
A traditional loan may have higher monthly payments, but the long-term costs of the loan are typically lower. This is due to a lower interest rate. The rate you qualify for will depend on your credit history, market conditions, the individual lender, and the size of your down payment.
Common Challenges for Self-Employed Borrowers
Self-employed borrowers face several unique challenges when applying for mortgages. Shifting income and the lack of a consistent pay stub may cause most lenders to hesitate regarding a self employed person. Additionally, business owners and investors often have multiple income streams, which makes it challenging to measure verifiable income.
Non-qualified mortgages are viable solutions because they are designed for those with unique income situations, including shorter credit histories. A non-QM loan is possible even if you have bad credit because of substantial business debts.
Is a Self-Employed Loan Right for You?
These home loans may be a solution in numerous circumstances. Do you have high credit card debt that is weighing down your DTI? Do you have a high credit score but lack a regular paycheck from your freelancing career? Would you struggle to meet the down payment requirements of a traditional loan, but you know you can afford higher monthly payments?
If these scenarios are your reality, an alternative loan product may be the best solution to help you purchase a home. Personal loans, cash advances, business loans, a home equity loan, SBA loans, and secured personal loans with competitive rates are all other options.
How TrueWay Mortgage Can Assist You
Borrowing money can be a complex process, whether a personal loan, mortgage, or Small Business Administration loan for your company. If you are not a traditional employee, qualifying for conventional mortgage products may be difficult. With TrueWay Mortgage, we know that every borrower has unique needs. Our team is ready to help you navigate the mortgage process with personalized service and real estate industry expertise.
Getting Started with Your Self-Employed Loan Application
Starting your application for a home loan is easy with TrueWay Mortgage. First, you can test different loan terms by plugging numbers into our mortgage calculator. You can also use our purchase assistant to determine your housing needs and how they will impact your mortgage. Finally, when you are ready to apply for a loan, you can create an account and get started entirely online.
If you have any questions and would like to speak to a TrueWay Representative directly, complete our contact form, and we will contact you promptly to discuss your needs.
