Getting Approved for a Mortgage With One Year of Self-Employment
Only one year of self-employment income? Here's how lenders evaluate your application and what you can do to improve your approval odds.
Imagine this: You've decided to take that first step to create your perfect future by becoming an entrepreneur. You planned on working for a few years before you decided to move since you know traditional lenders like to see a steady stream of income.
Suddenly, your dream home comes on the market. You know it won't last long, and you'll never find another home like it. But the problem is that you've only been your own boss for one year. Is that enough to let you qualify for your mortgage loan?
While this might not be your exact scenario, you probably have the same question. In this post, we'll cover how you can get approved for a mortgage with only one year of self-employment and things you can do to improve your chances.
Is It Possible to Get Approved with Only One Year of Self-Employment?
While you'll certainly have a more difficult time getting approved with only one year of self-employment income, it is possible.
Remember, lenders are concerned first and foremost about your ability to repay your loan. If they feel that your income isn't reliable or if they think there's a possibility you will default, you'll be classified as too risky, and your loan will be denied. According to the Consumer Financial Protection Bureau, lenders generally look at your debt-to-income ratio and credit history as part of this ability-to-repay evaluation.
So what scenarios would make lenders see you as a strong mortgage candidate?
Scenario 1: You're in the Same Industry
When you made the transition to self-employment, the chances are fairly high that you hopped into the same industry. This is good news for you!
If you've been working in the same field for a few years and your first-year income is comparable to your previous years, this will show lenders that you've demonstrated success in your industry and will likely continue to do so.
For example, imagine you were a graphic designer for a large marketing agency earning a salary, and in your first year of self-employment your business brought in a comparable or higher amount.
Due to your proven experience in the field and similar income, lenders will likely feel more secure about your financial status, which can improve your chances of approval.
Scenario 2: You've Got Excellent Credit and Large Cash Reserves
If you transitioned into a new career field, then your options are slightly more limited. You'll need to prove that you have the financial security to back up your loan, which means you'll need a lot more skin in the game.
An excellent credit score and large cash reserves are two of the best ways to do this. A good credit history will show lenders that you're a responsible borrower and that you make on-time payments.
Having a large reserve of money in the bank will prove that you have the funds to cover any outstanding debts or expenses. Plus, you'll be able to put up a healthy down payment.
How to Increase the Odds of Getting a Mortgage as a Newly Self-Employed Individual
When applying for a mortgage as a newly self-employed individual, there are certain steps you can take to increase your chances of success.
- Improve Your Credit Score: Minimum credit score requirements vary by lender and loan program, but you'll likely need a stronger score if you're relying on only your most recent tax return. Do everything in your power to get this as high as possible.
- Maintain Good Cash Reserves: The more cash reserves you have, the better. This gives lenders peace of mind that even if something goes wrong, you will have enough money to make your payments and not default on your loan.
- Provide Evidence of Future Income: If you're confident your income will continue to grow, lenders may be willing to take this into consideration. This can come in the form of contracts or letters from clients that demonstrate future income.
- Put More Money Down: Putting more money down on your home means you'll have less of a loan amount and, thus, be viewed as less of a risk. A larger down payment can help strengthen your application, though the exact amount that helps most will depend on your lender and loan program.
- Minimize Your Debt-to-Income Ratio (DTI): Lenders like to see that you're not overextended with debt, so they'll look closely at your DTI. According to the CFPB, a lower DTI generally improves your chances of qualifying, though specific thresholds vary by loan program.
Explore Your Options with Modern Day Lending
While it's not always easy to get approved with only one year of income, our team of experts over at Modern Day Lending is here to help you explore your options and find the right loan for your needs.
Unlike traditional lenders, we take a more common-sense approach to qualifying you for a mortgage. We'll take the time to learn about your business and financial situation to find a loan that works for you.
Some of our self-employed loan options may not require tax returns at all. Here's what you'll typically need to get started, though exact documentation depends on the program:
- Bank Statements: Instead of using your tax returns to prove your income, we may review your personal or business bank statements over a set look-back period to calculate your qualifying income.
- CPA Letter: A letter from your accountant stating how much of your business you own and its financial standing is often required.
- Business Questionnaire Form: This questionnaire is designed to assist us in understanding the prospective home buyer, the property they are interested in, and their ability to repay the loan.
- Personal Asset Statement: Documentation of the business's assets and liabilities is generally required.
- Driver's License: This is a formality to confirm you are who you say you are.
Ready to get started?
Our advisors are ready to provide you with expert advice and guidance. Contact us today and take the first step toward homeownership!
