7 Things Self-Employed People Need to Know Before Applying for a Loan
Self-employment has numerous benefits, but the lack of a steady paycheck can offset your financial plans and needs. Even though you may be financially stable and responsible for your monthly payments, banks and lenders are wary of approving loans to self-employed individuals as they are classified as a risk. At Loans SOS, we understand the struggles self-employed people face when applying for a loan, and we want to help you every step of the way. Whether you’re looking to refinance credit card debt or trying to get a mortgage, our dedicated team of professionals is here to advise and guide you to institutions that will grant you the loan you require.
Here are seven things to bear in mind before submitting your loan application:
#1: Apply Before You Quit Your Day Job
Before leaving your current 9 a.m.-5 p.m. position, it’s strongly recommended that you apply for your loan before pursuing your self-employed endeavours. With a stable paycheck in your pocket, you increase your chances of getting your loan application approved faster. You also avoid a two-year wait, so be sure to weigh all the pros and cons before leaving your day job.
#2: Prove Two Years’ Worth of Income
During the application process, lenders want to fully comprehend your financial situation. To determine how much credit you can receive, you will need to submit copies of your last two years of income tax returns. Keep in mind, however, that recently increased income may not be reflected on your tax returns and contracts showing guaranteed revenue in the near future won’t always be taken into account by lenders.
To better your financial prospects, be prepared to provide additional documents to your lenders, such as a balance sheet, income statement, expense report, and earnings and revenue statement.
If you’re already self-employed, consider limiting a few expenses. Whether it’s postponing your summer vacation, opting for homemade meals instead of dining out, or wearing the clothes and shoes currently in your closet, your savings will increase your income and better your chances at getting your much-needed loan approved.
#3: Show Stated Income
When you apply for a loan, you might have the option to declare stated income. This alternative allows you to directly state to the lender how much you make as opposed to proving your income with two years’ worth of tax returns.
However, you might only be given this possibility if you worked in the same profession for over two years before becoming self-employed. Keep in mind that stated income is a more complicated method to validate your earnings, and not every lender is willing to accept this as proof.
#4: Brace Yourself for Higher Interest Rates
Since lenders classify you as a bigger risk, there’s a possibility you might have to pay a higher interest rate on your loan. If you’re hoping for a mortgage and require mortgage default insurance since you don’t have the 20 percent down payment that’s needed, there’s a high chance you will have to pay more for that, too. These situations are to be taken into consideration before you consult with the lenders to determine the amount you can have loaned.
#5: Make a Larger Down Payment
If you’re currently looking to purchase a home, consider increasing your down payment to 20 percent and potentially avoid the hassle of mortgage default insurance payments. By opting for a higher down payment, lenders are more likely to be flexible and approve a mortgage loan for you.
#6: Reach out to a Mortgage Broker for Assistance
If you’re having difficulty obtaining a loan on your own, consult a mortgage assistant. With their expertise, they’ll be able to guide you towards the lenders who’d be more willing to grant you a self-employed mortgage.
#7: Secure Your Credit Score
Having a good credit score is crucial before considering applying for a loan. If you need help improving your credit score, consider making some financial changes, such as completing your payments on time and avoiding the use of your available credit for unnecessary expenditures. By making wise monetary decisions, you’ll boost your chances at getting a loan approved at a reasonable rate.
Loans SOS is dedicated to helping self-employed individuals connect with the most reputable lenders. We offer diverse services to our clients and help them obtain the loans they need to achieve their dreams. Contact us today for more information!