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Introduction
Finding a way to purchase a home is difficult for even the most qualified of buyers, however, for people who are self-employe the search for financing is even more treacherous. The main problem is that people who own their own business, especially home businesses, don’t have a steady income each month. Some months are high and some months are low. To lenders, this fluctuation in monthly income heightens the risk that the borrower won’t be able to make their home loan payment on time every month, and that limits many lenders’ willingness to finance homes for people who only have income from a home business or a young business. While it may be difficult for the self-employed to qualify for a traditional mortgage it is not impossible, nor is it the only option.
Owner Financing
One option that the self-employed person can use to purchase a new home is to find a seller that offers owner financing. This type of situation can offer the self-employed person the easiest way to get into a house. The advantages of this financing option is that it often has lower qualifying requirements, less paperwork, and the process from qualifying to getting into the house is much faster. On the other hand, this financing option also has a few drawbacks such as: you are dealing with an individual and not a financial institution, you will probably need to involve a real estate attorney to handle the agreement and title transfer, you will probably have to pay higher interest rates, and the terms of the financing will not be as flexible as a financial institutions’.
To find a property that offers owner financing simply read through the real estate classified section of your local newspaper and look for phrases like “MOTIVATED SELLER,” “OWNER FINANCING AVAILABLE,” “ALL OFFERS CONSIDERED.” These phrases indicate that the seller may be in a position where they need to sell their home quickly and are willing to negotiate the price, terms, and payment options. Even if it is not stated as a possibility, sellers that need money or who are facing bankruptcy or foreclosure may be willing to carry the contract with a large down payment. In any case, it doesn’t hurt to ask. Also your realtor can be an excellent resource when trying to find a property that offers owner financing as they are working to sell properties as much for the sellers, as they are to find a house for buyers.
Even if the terms are not ideal, you can view owner financing as a way to gain equity in a home until you can qualify for a more lucrative mortgage.
Assumable Loans
Another option is to find properties that offer a take-over-payment option. This situation often presents itself if the owner is having financial difficulties, they are facing bankruptcy or foreclosure, or if they are moving and have had trouble selling their home. In some cases the owner will ask for a downpayment, and in other cases no downpayment will be necessary. If the home has an FHA assumable loan then you can just take over payments without qualifying and without a lot of paperwork that is often associated with home finance. The benefit to taking over an FHA assumable loan is that it is also contains a Streamline Refinancing Option that allows the borrower to refinance easier when interest rate are lower.
Lease/Option
The lease option scenario gives people who are self-employed a way to get into a home and earn “quasi-equity” before they need to qualify for a traditional loan. In this case, the “renter” lives in the house and makes monthly “rent” payments. At the end of the lease term (1 year, 5 years, etc.) a portion of each rent payment is applied towards the downpayment if the renter decides to exercise the option to buy the house. If the renter decides not to buy the house they can walk away from the situation without any further obligations, however, they lose the “quasi-equity” that they have accumulated.
For example if a house rents for $800 per month and offers a 5 year lease with an option to buy, with 50% of the rent applied towards the downpayment, and a purchase price of $150,000. After 5 years of renting the renter will have accumulated $24,000 of “quasi-equity” that can be used as the downpayment and they will only need to finance $126,000 in order to purchase the house.
The advantages of this situation are that you can lock in a lower purchase price and have five years (depending on the lease) to make your final decision to buy or not. You also have time to get to know the house and neighborhood and to see if these things fit your needs and wants for a community. If the house is too small, too big, or need major repairs at the end of the lease period you can walk away without worrying about selling the house or paying off your home loan. You also don’t have to pay homeowner’s insurance or property taxes during the lease period because you are technically just renting the house. This can save you thousands of dollars per year.
National Home Buyers Association
This option is good if you have a new home business, or if you need time to improve your credit rating before you can officially get financing. It is basically just a lease/option program that is sponsored by an organization instead of an individual. The NHA offers to buy the home of your choice and lease it back to your for the period of one year. During this time, you can establish your credit history, increase your annual income, or improve your credit rating by paying off credit cards and making on-time payments.
To qualify for this program you have to be able to pay a commitment fee equal to 3% of the purchase price of the home, and be able to pay a monthly rent equal to 1% of the home’s purchase price.
The benefits of this program are that 50% of the rent that you pay each month is applied to the purchase price of the home after the one year lease period, you don’t have to pay homeowner’s insurance or property taxes, and you don’t have to buy at the end of the one year lease.
Example:
- Home Value $200,000
- Commitment Fee $ 6,000
- Monthly Rent $ 2,000
- Downpayment Earned After One-Year $ 12,000
Interest Only Mortgage
Another popular mortgage option is the interest only mortgage. This option allows people to buy a more expensive house for less money per month. The premise of this option is that the borrower will only pay the interest for the first 5, 10, or even 15 years, after which time the payment will increase dramatically to cover the principal amount that is left. It is assumed that the borrower in these cases will either refinance or sell the home before the end of the interest only payment period.
The advantages of this option are that borrowers can qualify to finance a more expensive home, they have smaller per month payments, it is easier to qualify for, and it allows the borrower to shop around for a better mortgage option and it gives the borrower time to either establish their business’ finances, or to strengthen their credit standing. The final benefit of this option is that the borrower can make additional payments to reduce the principal without penalties. This gives people without a consistent monthly income the chance to buy a home without worrying about making a huge mortgage payment each month. The smaller payment is easier to handle during months that have low cash flow, and during months of higher cash flow the principal can be paid down earning the borrower equity in their home.
The disadvantages of this program include: a sharp increase in payment amounts after the end of the interest only period, and the homeowner doesn’t earn any equity in their home by making the monthly payments unless they add to the amount that is expected.
Traditional Mortgage
Qualifying for a traditional mortgage when you are self-employed may be more difficult than qualifying with a regular job, but it is not impossible. To improve your chances you will want to have the best credit rating possible for both your personal finances, and for your business. To do this you should:
1. Pay off all of your credit cards but keep the accounts open.
2. Make on-time payments.
3. Correct mistakes and update your credit report.
The next step to improving your chances of getting a traditional loan when you’re self-employed is to have your income and assets well documented and ready for the financial institution’s review. This includes: contracts, financial reports (last three years), tax returns (last three years), marketing plan, projected earnings report, bank statements, copies of royalty checks or residual checks, and any other letters of credit reference.
If you still are not able to get a traditional loan you may want to consider putting more money down in order to qualify. Instead of 5% down, put 10, 15, or 20% down. The more money that you are willing to put down, the more secure a bank will feel when considering you for a home loan.
Source: FineTuning.com

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