Tips To Put Your Best Application Forward
As your own boss, you want your business to look its best to prospective clients. As someone who wants to buy a home, you want your loan application and finances to look their best to lenders.
Tip 1: Check Your Debt-To-Income Ratio
Your debt-to-income ratio (DTI) is the percentage of your net business income that goes toward paying your monthly debts. Lenders pay attention to this percentage. A low DTI ratio is a hallmark of healthy finances and can indicate to lenders that you have enough money in your budget to comfortably afford a mortgage payment.
To calculate your DTI, divide your monthly recurring debt by your gross monthly income. You shouldn’t include bills, such as utilities, property taxes, groceries and repairs, when calculating DTI because their amounts can change each month.
If your DTI is more than 50%, focus on reducing your debt before applying for a mortgage.
Tip 2: Keep An Eye On Your Credit
For lenders, the credit history in your credit report is a strong indicator of your ability to repay debts. Unlike your DTI, the higher your credit score, the better your chances of approval and favorable loan terms.
Another measure lenders consider is your credit utilization, which measures how much of your available credit you use.
For example, if you’re using $10,000 out of $20,000 in available credit, your credit utilization is 0.50, or 50%. Like your DTI, the lower your credit utilization ratio, the better it is for your credit score, which is better for your mortgage application.
Tip 3: Try To Keep Business Expenses Separate
If your credit utilization is high because you charge business purchases to your personal credit cards, this may harm your application.
While it may not be possible to keep your business and personal expenses completely separate on your credit report, it’sa good idea to keep your business and personal expenses separate. Wherever possible, use separate accounts and credit cards to present a more favorable, straightforward profile on your application.
Tip 4: Consider Alternative Loan Options
Consider other home loan options if you can't get approved for a conventional mortgage loan. A self-employed borrower may qualify for a Federal Housing Administration (FHA) loan or qualify for a Department of Veterans Affairs (VA) loan if they’re an eligible active-duty service member, veteran or surviving spouse.
Tip 5: Be Ready To Make A Larger Down Payment
While you can buy a home loan with a smaller down payment being able to make a larger down payment, may help convince lenders to approve your mortgage and offer a lower interest rate. If you need help coming up with the money for the down payment, see if you can take advantage of down payment assistance programs.
Tip 6: Find A Co-Signer Or Co-Borrower
If you suspect your employment status and income history are getting in the way of mortgage approval, recruiting a co-borrower or co-signer may help. The right candidate should make enough money and have a high enough credit score to improve your chances of qualifying. Just make sure your co-borrower or co-signer understands the legal responsibilities associated with their role.
