As a refresher, we are thinking about buying our next home within the next two years. We don’t think we want to stay in St. Louis, and we are looking at moving possibly to Colorado or Florida. Yes, yes, I know these two states are completely different, but they both have some great advantages of living there.
Getting approved for a mortgage these days is a little bit harder in the past. I remember when we bought our first home, the process was a breeze. Our loan officer even told us that we were the easiest loan he’s ever done.. I have been told that I will not be that lucky this time around because rules are more strict and because we are now self-employed.
You will want a good credit score.
A good credit score is needed whether you are self-employed or not these days, but you will need something a little better if you are self-employed. You will most likely want a credit score above 740 in order to qualify for a loan from your bank.
We are wanting to have our credit score be as near perfect as we possibly can get it. Currently, we are both in the 760 range. It would be higher but we’ve been travel hacking, which has slightly lowered our credit score.
You will want a large down payment.
For the home we live in right now, we paid a very small down payment towards it. Because of it, we also pay PMI, and that’s something we don’t want to do again.
Also, most mortgage companies will want a self-employed person to put down more than 20% on a home because they want to know you are invested in it.
I have heard of some banks asking for between 25% to 30% as the down payment. That is a lot of money that we will need to save before we even start looking for a home!
Lower debt to income ratio.
If you are buying a home, then you will need to work on your debt to income ratio, especially if you are self-employed.
Your loan officer will most likely want to see something below 40% so that you are not overwhelmed with a loan. We will be much lower than that thankfully, so this is not an area we need to worry about.
You will want an increased income.
Most self-employed people deduct routine business expenses from their taxes in order to decrease the amount they owe in taxes. However, this may count against you when applying for a mortgage because your loan officer is going to look at your bottom line to determine how much of a home loan you can afford.
The bank will usually average your last two years. However, if you made less money in the most recent year than the year before, they might only take that number.
If you are self-employed person, most banks will ask that you have at least two years of self-employment experience. If you have less, then they may turn you away completely or give you a higher interest rate.
How was the mortgage process the last time you bought a home? Did anything go wrong?
If you are self-employed, please, especially, share your experience!
Image via Flickr by Billy Metcalf Photography