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THE ABC’S of Borrowing

Among its many aftershocks, the financial meltdown of 2008 resulted in a tightening of credit standards for every potential borrower.  As such, would-be home buyers who wish to finance their purchases must now be prepared to submit full documentation—verifying their income stability and assets—before taking advantage of some of the lowest mortgage interest rates in recorded history.

The basics that every borrower should know are these:

— You must have established credit with a minimum FICO score to meet the type of loan you are requesting.

— You must have down payment funds in a liquid account ready to be documented at the point of loan submission.

— You must have enough income to support a debt-to-income ratio of approximately 38%.  Some loan types may allow a higher ratio, while others may limit it to 35%.

— Always get pre-approved for a loan before you begin your property search.

In dealing with this new set of lending criteria, self-employed borrowers are likely to notice even greater scrutiny during the application process.  This is not unusual since many entrepreneurial individuals, though well-compensated, often do not receive regularly-timed paychecks like traditionally employed applicants.  But this is no reason to expect rejection.  Being self-employed will not always prevent you from enjoying the cost-saving benefits of our recovering housing market for want of a loan.

Home loans are being made every day to self-employed individuals throughout Southwest Florida, which has a long and storied history of attracting successful entrepreneurs, artists, writers, freelancers and independent contractors of all types.  Lenders are simply exercising an abundance of caution with respect to disbursing future loans.  Like other borrowers, self-employed home buyers must prove they are reasonably secure in their professions and can comfortably handle their monthly payment obligations.

Mindful of the challenges many self-employed borrowers face—even while earning a comfortable wage and having a sizeable down payment on hand—here are some tips to help prepare successfully for the loan application process:

  1. Produce all requested paperwork: As an independent contractor, you will be requested to produce more documentation than a traditionally employed borrower with regularly scheduled paydays. Lenders will likely ask more questions about your expected source(s) of income; and require you to produce physical evidence to back your claims.

   2. Demonstrate your long-term income stability: Lenders want reassurance that your income has been stable for a substantive period of time and can comfortably support regular monthly payments.  Most will expect to review your year-to-date earnings in order to document income and make sure it comes in with some degree of regularity.

  3. Pay down as much of your outstanding debt as possible: Expect to have your credit history and all outstanding debt scrutinized during the application process. You will improve your prospects considerably by having less debt on your balance sheet and a history of paying it down.  Letters of explanation will probably be required for any derogatory credit filings or recent credit inquiries; as well as any changes or gaps in employment.

  4. Produce at least three years of tax returns: Even if you’ve only been self-employed for a year, showing a few years’ worth of returns will help confirm job stability within your industry, and even provide a glimpse of the salary you’d fetch in a regular payroll job.

  5. Prepare evidence of savings: Checking, savings and investment accounts should be documented with two months of the full monthly/quarterly statements—not printouts of online banking or investment activities.

Mortgage interest rates are always subject to change.  Learn more about how to best secure a mortgage at today’s historically low rates by contacting one of the professionals at MSC Mortgage.  MSC Mortgage, an affiliate of Wells-Fargo Home Mortgage, provides one-stop shopping for mortgage loan products; and is consistently ranked as one of Southwest Florida’s leading community-based lenders.

  • User Gravatar Susan Wilson
    October 2nd, 2011

    Good article regarding mortgages from Bob Lambert, our in-house Wells Fargo mortgage person.

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