I Have a Credit Score of 811. Here’s Why Getting a Mortgage Was Still a Challenge for Me

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Getting a mortgage isn’t easy when you’re self-employed, as lenders get nervous when you don’t have a traditional employer. Here’s what you should do. 

If I do say so myself, I am the ideal candidate for a mortgage loan. I have an 811 credit score, I keep my housing and debt costs well below the recommended 36% of income, and I have assets in reserve so there’s a very low risk I’ll default on the loan.

Despite seeming like the perfect borrower, I have had challenges every single time I have applied for a mortgage. It’s taken me a long time to get approved and some lenders refused to give me a loan at all.

Here’s why.

Self-employed borrowers face a host of challenges in getting a mortgage loan

There’s a simple reason why I have had a hard time getting a mortgage each time I wanted to buy a house. The issue is that I am self-employed. And that’s a problem for a lot of different reasons, including the following:

It’s harder to prove income when you’re self-employed. I don’t get a steady paycheck from an employer who gives me paystubs. My income comes from my business. So, lenders have to comb over tax returns to try to determine how much I make.Self-employed borrowers may have lower incomes on paper. When you are self-employed, you can claim a lot of tax deductions that other people can’t always claim. It makes sense to reduce your taxable income as much as possible by claiming deductions. But that makes your income look lower when you try to get a mortgage. This is an issue in my family, because both my husband and I are self-employed. We claim every deduction and business expense we’re eligible for. Self-employed borrowers may have less stable incomes. If you get a traditional paycheck, chances are good you make about the same amount each year. This often isn’t the case if you’re self-employed. My income has fluctuated substantially over the years, and it has also come from different clients rather than from the same employer each year. Down payment funds may appear to come from “business accounts.” If you have any money in your business account that you plan to transfer to your personal account to help cover the down payment or closing costs, this can raise lender concerns about the impact this withdrawal will have on company operations.

If you are self-employed, chances are good you’ll have these same issues. And they can make getting a loan a lot more hassle. Not only will you have to submit a ton of extra paperwork and documentation, but you may not have all your income counted to determine if you can borrow. And, some lenders may simply decide they don’t want to lend to you because your lack of traditional employment creates too big a risk.

What can you do if you’re struggling to get a loan?

Although I have had trouble getting a mortgage loan due to my self-employed status, I’ve ultimately been able to succeed each time I’ve purchased or refinanced a home. If you’re also having a hard time getting a mortgage, either because you’re self-employed or for other reasons, here are some steps I’ve taken to resolve the problem that may work for you as well:

Find a lender that specializes in your situation. If you are an entrepreneur like me, look for a mortgage lender that frequently lends to business owners. If you have low credit or limited income or a lot of debt or some other obstacle, find a lender that caters to the type of borrower you are. It does you little good to apply with a lender who isn’t experienced in handling similar clients or who doesn’t want to lend to people like you. Buy less house than you can afford on paper. If you already present a risk to a lender, don’t aim to stretch your budget as far as it will go. Borrowing less than you can afford will reduce the risk to the lender — and will also help you keep your housing payments affordable. Make a bigger down payment. Putting more money down also decreases a lender’s risk and makes it more willing to give you a loan.Aim to fix the issues you can. If you can make a change to become better qualified, aim to do so. For example, when I got my most recent mortgage, I moved all my business funds over that I’d need three months before I applied for my home loan. Since the lender only asked for three months of bank statements, I didn’t have to provide a long explanation about the impact of the business funds transfer since the lender didn’t see it. If you can, try to fix whatever your problem is, such as by paying down some debt if you owe a lot relative to what you earn. You could work to improve your credit score by asking lenders to remove negative information from your record.

Taking these steps before applying for a home loan can save you a world of hassle. You may still struggle as I did, but at least you’ll be prepared and ready to maximize your chances of success.

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