Applying For Mortgage for the Self-Employed in Los Angeles

Applying for a mortgage as a self-employed individual in Los Angeles has never been a walk in the park. The odds stacked against folks in this financial category when it comes to securing a housing loan are so great that many are starting to think that is impossible.

While it can be quite difficult, a mortgage for the self-employed in Los Angeles or anywhere in the United States of America can still be secured if you know how to go about it. One thing you will require is a lot of documentation which is necessary since your income is not dependent on an employer. 

Many lenders are skeptical about giving mortgages to self-employed folks because they are not certain if you will get enough income that will be sufficient for your monthly repayments. This is one major reason W-2 employees secure this kind of loan more easily.

Apart from this, due to the extra paperwork that is required before this housing credit can be provided to a person who is not employed by an organization, most creditors choose to avoid giving out this mortgage altogether.

This bias can be very discouraging when viewed from the surface; however, as a self-employed individual, you can still secure a loan by becoming a better attractive candidate and we will show you how to become one.

But before we do that, let us get a better understanding of the disadvantages of applying for a mortgage as a self-employed individual.

Disadvantages of Applying for a Mortgage as a Self-Employed

Most creditors do not consider independent business owners as perfect borrowers. They are not considered creditworthy since their income is not easily verifiable. This is in stark contrast to employees who can provide the lender with a W-2 upon request. Hence, they have to deal with more paperwork and documentation to show their income and financial history.

Another reason it is difficult for independent business owners to secure a mortgage is that in most cases, the business expenses are used to cut the taxable income that is placed on tax returns. Hence, most creditors cannot ascertain if the individual who is applying for the loan will be able to make payment.

Furthermore, some lenders, most especially banks prefer LTV (lesser loan-to-value) ratio. In other words, they require that your need to make a down payment that is larger to serve as a sort of guarantee of sorts. Visit https://www.investopedia.com/terms/l/loantovalue.asp to learn more about the loan-to-value ratio. While the last disadvantage might seem like it is peculiar to the self-employed; however, it is not the case.

A lot of creditors these days require this from all kinds of borrowers before they approve the loan. You should also know that the requirements differ from lender to lender. Hence, you should look for a lender with requirements that are best suitable for you.

Becoming an Attractive Mortgage Candidate

There are a few things that you can do as a self-employed to improve your chances of securing a housing loan. Here are some of them below:

1. Create a Track Record as a Self-Employed

Everyone loves a good track including financial credit institutions. Hence, one of the best ways to improve your chances of securing that loan is to show them how capable you are over the years despite being independent.

Therefore, create a history that stretches back to a minimum of two years, if you could go further back the better. The idea is to use this history to portray yourself as having a stable income.

2. Offer a Huge Down Payment

Remember we talked about how most lenders are asking for huge down payments? Well, the thing is you can use this to your advantage if you have some extra cash to spare. All you need to do is offer a huge down payment.

This idea is that with such huge home equity, the creditor believes that you will not walk away when things get financially difficult. The financial institution will not consider you as a risk when they look at the amount you have deposited as a down payment. This is because it paints a picture of your financial stability to a large extent if you could readily make such payment even before acquiring the house.

3. Get the Highest Credit Score

Credit score as most folks have come to realize is that it plays a vital role in determining whether you get a mortgage or not. If you have a low credit score, no financial credit institution will give you second thoughts.

However, with a very impressive credit score, you prove your creditworthiness to the lenders. This, in turn, allows you to access better loans with reduced interest rates. Therefore, you should focus on how to improve your credit score to be the best. Click here to learn how to improve your credit score.

4. Clear All Your consumer Debt

This is not only for the sake of getting a mortgage; it is also to help you make payments more easily. What do we mean? Simple, when the monthly repayments of your consumer debt are fewer, you will be able to easily meet up with your housing loan monthly payments.

In some cases, depending on your lender, if your credit cards, as well as, car loans are paid off, then you might be qualified for a better loan.

5. Have Substantial Cash Reserves

Cash reserves serve as guarantees to the lenders that even if your business faces a downward spiral that could affect your repayments, you will still be able to make repayments from the cash reserve you have accumulated.

In most cases, cash reserves are the more accepted form of emergency funds. However, if you own liquid assets that you can easily convert into cash will also win you favors in the sight of the creditor.

6. Provide All the Required Documentation

As we said earlier, you will be required to go through a lot of paperwork and document presentation. When they ask for any documentation, ensure that you make them available.

You need to have your income documented via tax returns of the past years, balance sheets, profit and loss statements, etc. All these will boost the chance of securing the loan.

Below are some of the things your lender might ask you to present:

i. Bank statements

ii. Debts list and your monthly payments

iii. Assets list

iv. Proof of business (license, account statement, clients’ letters, etc.)

v. Other income sources (social security, alimony, etc.)

Mortgage Options for the Self-Employed

If you don’t qualify for the conventional mortgage, you can still get one that is designed for the independent. Below are some of these options:

1. Federal Housing Administration (FHA) loan. An FHA loan is issued by a lender that is approved by the Federal Housing Administration who is also responsible for the loan insurance.

2. Bank statement loan.

3. Joint mortgage.

4. Recruit someone to co-sign with you.

We recommend that you make further research on all the above options to find out which is best for you.

Conclusion

Applying and securing a mortgage as a self-employed can be quite difficult; however, it is possible if you become an attractive candidate using the tips we shared above.