Get That Loan! Three Tips For Getting Approved For A Mortgage When You're Self-Employed

If you are self-employed, you may be worried that you will not be approved for a mortgage due to your fluctuating income. Fortunately, lenders are willing to extend credit to self-employed home buyers, especially those with good credit. You can increase your chances of securing approval for your mortgage by following these three simple tips

1. Be Prepared to Provide Documentation

When applying for your mortgage, be prepared to provide your lender with ample documentation concerning your income.

You need to supply your lender with complete tax returns for the past couple of years. You cannot supply these returns yourself; rather, the IRS must directly send the returns to your lender. You can fill out IRS Form 4506-T so that your lender has your permission to request your tax returns.

2. Maintain a Low Debt to Income Ratio

Regardless of whether you are self-employed or employed by a company, maintaining a low debt-to-income ratio is a an effective way to increase your chance of securing loan approval. Two ratios are used when calculating your debt-to-income ratio: the front end ratio and the back end ratio.

Your front end ratio is simple to calculate. All of the debt relating to your home purchase should not exceed 28 percent of your gross income. If you bring home $10,000 a month, your mortgage payment must be less than or equal to $2,800.

Your back end ratio a bit more complex. All of your debt payments, including your mortgage, must not be more than 36 percent of your gross income. This includes student loans, car loans, credit cards, and personal loans as well. With an income of $10,000 a month, all of your debt payments cannot be more than $3,600.

If you are having trouble qualifying for a mortgage, try to pay down your debt. This decreases your back end debt-to-income ratio, making it more likely that your lender can approve your loan.

3. Plan Ahead When It Comes to Your Business Deductions

When your mortgage lender calculates your income, the final figure takes into account your business deductions. Taking too many deductions, even if they are legitimate, can lower your taxable income and make it difficult to qualify for a mortgage. Though a lower taxable income is normally a positive thing because it minimizes your tax obligation, it can be negative when you are applying for a loan.

Since lenders look at two years worth of financial information, it may make sense to minimize the amount of business deductions that you take during this time period. Try to postpone major business expenditures until you have closed on your loan. For more information, contact a company like First Mortgage Company, Inc.