Getting a Bad Credit Mortgage When You're Self-Employed

By Barbara Marquand
Mortgage Credit Problems Columnist

Getting a mortgage when you're self-employed isn't impossible, even in today's tight credit market in the wake of the mortgage mess, but it's a lot tougher than a few years ago.

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No matter how reliable you are, self-employment puts you at a disadvantage because your income is more difficult to document. You don't receive W-2 forms, and, if you're like many self-employed folks or owners of tiny businesses, your income may vary by by a lot from one year to the next. In addition, you might maximize deductions from business expenses, which minimizes your net income on paper.

The days of mortgages based on stated income with little or no documentation are over. Now lenders want to see black-and-white proof that you're able to pay.

So what does that mean for you? Here's what to expect:

  • Save for a bigger down payment.

You may need to fork over a bigger down payment than someone else who's not self-employed and can document a steady income. Lenders want a less-risky loan-to-value ratio because your income may vary more than that of other candidates.

  • Shop harder, especially if you need a poor credit mortgage.

You might have to look harder for a lender that will approve the loan and offer you a decent rate. That's especially true if you've suffered some financial setbacks, as so many small-business owners have, and need a poor credit home loan. Start by filling out the form on this page to get initial quotes.

  • Keep good records.

Be prepared to document your income. Gather as much hard data as you can, such as previous tax returns, balance sheets, clients lists, profit and loss statements, and perhaps a financial audit by a CPA.

  • Improve your credit score.

Your credit history is critical. Get copies of your credit reports from AnnualCreditReport.com and follow directions to correct any factual errors that might ding your credit score. Then take steps to repair your credit. Pay down credit card debt and maintain balances under 30 percent of your credit limits. Catch up on any overdue payments, and pay your bills on time. Late payments stay on your credit reports for seven years, but they impact your credit score less as time goes on, so the quicker you catch up and minimize damage, the better.

Finally, if you need to put off getting a mortgage, keep in mind how your income looks on paper to lenders, and consider taking fewer business deductions to boost your net income and improve your chances for getting a loan.

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