Ever wanted to take a peek inside someone else’s home buying journey? Well, you’ve come to the right place. We’re lucky that Carrie S. Nicholson, one of the 15 partners in the Down Payment Movement has agreed to share her own story as she begins the process of buying a home. This is Part 4 of her story.
Over the past few months, my husband and I have been sharing our journey to being homeowners. We started out by researching the current real estate market and narrowing down the neighborhoods where we want to live.
Next, we found a real estate agent and started getting serious about our home search. Throughout this entire time, we were also working on our credit score and trying to save as much money as possible.
Our final step before actually finding the home of our dreams and making an offer, is to get pre-approved for a mortgage when self-employed. And that’s what you’ll find in this post!
Here’s an insider’s look at the process of getting pre-approved for a mortgage, specifically when you’re full-time self-employed.
Get Pre-Approved at the Right Time
As a new homebuyer, you may think that you have to get pre-approved for a mortgage BEFORE you start your home search. I’ve learned recently that this is not always the best idea.
Since going through the process myself, I’ve found that the best time to get pre-approved for a mortgage is about 30-90 days from when you hope to buy a home.
Most pre-approval letters from banks will come with an expiration date that is anywhere from 30 days to 90 days after your initial pre-approval date. Some of the pre-approval loans and rates even expire in as little as 30 days — at least this has been our experience recently.
Since our current apartment lease expires on July 29th, we would like to get into a house by that date. This should give us a good timeline for getting pre-approved for a mortgage, but we are cutting it close.
What Applying for a Mortgage Does to Your Credit
If we don’t find anything by then, we may have to re-apply for a mortgage, which isn’t ideal. Going through the mortgage approval process means that banks and other lenders will be looking at your credit report and evaluating your overall financial situation.
Doing this usually requires a “hard inquiry” on your credit profile, which can cause your credit score to drop. While the credit bureaus usually give you a grace period known as your “rate shopping period” where all inquiries will be counted as one, if you continue shopping around for different mortgage loans and rate offers beyond that time, your credit score will continue to decline. This could be the difference between getting a great interest rate on a mortgage and possibly being rejected for a mortgage altogether.
In my personal experience, since going through the pre-approval process this month, my credit score has dropped about 13 points — from 695 to 682. Since I am still talking to different lenders, my score may continue to decline, too.
Usually, the credit bureaus are smart enough to notice when you are “rate shopping” and allow you to apply for multiple loans of the same type within a short time frame, usually 14-45 days, without drastically affecting your credit score.
This is why it’s important to get a pre-approval letter from your bank or financial institution and aim to complete the homebuying process before the 30-90 days are up.
Apply Online as a Customer
When applying for a mortgage the easiest place to start is with an online application. It might make sense to begin with a financial company or bank that you already have a relationship with. Since I’ve been a customer of Chase for many years, I logged into my online banking account and applied for a mortgage through my online customer portal.
My husband and I are also part of a local credit union here in Denver so we are in the process of applying for a mortgage with them. This is easily done through our online banking portal as a current customer and is pretty straightforward.
In order to start the online mortgage application process, there are a few details you’ll have to input:
- Full name
- Current physical address
- Social Security number
- Current income
- Last two year’s worth of income taxes
- The same information for the co-borrower (if you have one)
For the most part these are basic preliminary questions and a loan officer will follow up with you via email or phone call to verify other financial information. Be prepared to answer such questions like how much debt you have, what your credit score is, how long you’ve been in business, and other details.
To start the house hunting process though, you only need a pre-qualification letter or pre-approval letter. This paper will show how much the loan will be for, the interest rate, and the expiration date. Most homeowners and lenders require a pre-approval letter before you can officially put in an offer on a home.
Tips for Self-Employed Home Buyers
As someone who’s full-time self-employed, I’ve encountered a few extra obstacles that someone who is a W-2 employee won’t have to deal with.
In addition, my husband is a seasonally employed chef, so he doesn’t have steady income either. Because of this it’s been a bit of a struggle to get approved for the amount of money we were hoping for. In fact, we’ve had a few banks withdraw their applications at hearing that we are full-time self-employed.
Increase Net Income
When we first started looking at homes in Boulder, CO we wanted to stick to a budget of $400,000. But this was based on the fact that we earn around $100,000 gross income every year.
However, banks want to know what your NET income is when applying for a mortgage. When looking at our last two year’s worth of tax returns and finding the AGI (adjusted gross income) line, we have an average of around $72,000 of net income.
Net income is found by taking your gross income minus any business expenses and other deductions. This of course, means that our housing budget has gone down. We’ve only been able to get quotes for a mortgage in the $300,000 – $350,000 ranges. Which is a bit below our hopes of anything affordable in our original target area.
Be Open to Alternative Areas
Because of this slight setback with finding the right funding, we’ve decided to move out of Boulder into a place that’s more affordable, like Colorado Springs. My husband’s parents and some other family members live here, as well as a few close friends.
We also get more house for our budget, and don’t have to settle with living in a townhome with no yard (which is hard for a professional chef who wants an herb garden!). The great thing too is that we will likely have a much lower mortgage payment — including taxes, insurance, and HOA costs — than we paid for renting in Boulder.
So we’re taking this as a win!
Work with a Mortgage Broker
If you’re finding it difficult to get a mortgage when self-employed, consider working with a mortgage broker. This is someone who works on your behalf to get the best mortgage loan, interest rate, and match you with the best bank.
We’ve found that a mortgage broker has greatly increased our chances of getting the home of our dreams (especially since sellers often run the other way when seeing a full-time self-employed buyer).
A mortgage broker can shop around for the best offers and interest rates, as well as negotiate for a higher purchasing budget. Our mortgage broker has helped us be more prepared for the questions that a bank will ask, and offered some simple alternatives to being turned down by other financial institutions.
When you’re full-time self-employed and need help buying a home, a mortgage broker can be a huge help. It’s nice to feel like someone is finally on your side!
Focus More on Cash Flow
Another main factor that comes into play, that usually doesn’t when you’re a W-2 employee, is having decent monthly cash flow. In the past couple months of dealing with different banks and lenders, I’ve seen much more emphasis on debt-to-income ratio versus having cash in the bank.
My husband and I have a car loan and some credit card debt, but since we’ve been saving for a home we haven’t been focused on paying off our debts. So some of our cash flow has been tied up.
However, after talking with our mortgage broker and a few banks, we are focusing 100% of our efforts on decreasing our debts and increasing monthly cash flow. This will give us a lower debt-to-income ratio and thus a higher monthly mortgage payment to work with.
When you’re self-employed, cash flow is king!
Mortgage lenders want to see that you earn consistent income without a lot of obligations every month. This is another reason why it’s important to have a two year plan before choosing to buy a home. You’ll be required to submit the past two year’s worth of tax return to prove consistent self-employment income.
The Bottom Line
Over the past few months, our home buying strategy has changed quite a bit. In fact, we’re not even looking at homes within our original target area and have changed real estate agents. But I have to say that I’m not at all surprised by this.
When you’re full-time self-employed for as long as I have been (7 years and counting!) you learn to change your financial strategy often. You also have to change your mind and adapt very quickly to an economy that isn’t that accepting of self-employed business owners. In other words, you have to be more creative with your finances!
Still, we have our sights set on a few key neighborhoods in Colorado Springs and the surrounding areas. And thanks to the help of our mortgage broker and real estate agent, we are confident that we’ll be in our own home by the end of the summer!