Getting a mortgage is already hard, but when you add low credit, self employment, no income documentation, or no down payment in hand, it gets harder. Can the house of your dreams ever become a reality? If you do things correctly, then yes, it certainly can. There are steps you can take no matter your financial situation or what other hardship has befallen you. Sometimes there are mortgage programs designed specifically for people with your issue, so that you and others like you can get keys in their hand to their new home just like anyone else. Lenders issued $34 billion of unconventional mortgage loans in the first three quarters of 2018, so it is absolutely possible to do.
Let’s discuss the different ways you can bypass obstacles in your financial or employment situation to getting the best mortgage for you.
Low Credit or No Credit
Sometimes life gets in the way and money is tight. It can happen to anyone. A credit score between 600 and 700 will typically get you a traditional loan with little to no issues, and likely with a “big name” lender. If you have paid all your bills on time, kept your debt to a reasonable limit, and had no major bankruptcies, you should have a decent credit score. Anything less, and you’ll have to get creative with where you get your mortgage loan! There are companies that work exclusively with people who have low or no credit. If you’ve had a bankruptcy in the last few years, you might need to contact a private mortgage lender, as well. A mortgage broker can put you in touch with these companies and lenders.
You may also be able to offset the damage done by low or no credit by being able to offer a higher down payment than you otherwise would. Typically you can get a mortgage loan with only around a 5% down payment, but in this case, aim for closer to 20-25% down payment. It is a much larger amount to save for that might take longer, but it can be well worth the trouble. It gives you more leverage when it comes to negotiating a mortgage rate.
However, be prepared to pay more in fees. Lenders can charge up to 1% of the entire loan amount for processing an application for a loan with bad credit. You might pay more in mortgage rates, as well. If you want to access a lower mortgage rate by renewing or refinancing in the future, be sure to pay all of your mortgage payments on time and to do what you can to boost your credit score.
No Pay Stubs or Proof of Income
It can be tough to get a loan without proof of your income or employment. Lenders do need proof that you can repay them, after all! Your loan officer might request pay stubs, W-2 forms, bank statements, or tax returns to verify that you have a steady income.
This sounds par-for-the-course, but it might not work for you. Self employed people and those who live off of commission or tips may not have consistent income that is easy to prove. Even if you earn enough to repay your loan, if you can’t prove that, it can be hard to get one.
However, you’re in luck. There are ways around this. In rare cases, you may be able to get a “No Documentation” Mortgage. These are not often given, but can be found. In this case, your loan is based on credit ratings, liquid assets, and other assets that can be used as collateral in case of default. If this doesn’t work out, you can consider a Stated Income Loan. This allows an applicant to state how much they make without proof as long as they can also offer up excellent credit of at least 720 and liquid assets on hand that total all living expenses plus the cost of the mortgage for at least six months.
That doesn’t work either? Well, you can also go the route of a co-signer. In some cases, this allows unqualified buyers to secure the funds for a home. The co-sign documentation can take the place of traditional documentation.
No Down Payment
Now there are other avenues for someone with no down payment to take. The alternative to the extremely rare zero down mortgage loan is called a flex-down mortgage loan. That means you’re able to use a line of credit or a personal loan towards your down payment. Not every lender offers this, but you can find it. You must also have a good credit score to qualify for this.
If you have family that is willing to assist you with the down payment, you can cover the down payment on your home with that gift from them. There is a specific process when you do this, though, so be sure to ask your broker or lender.
If neither of these options work for you, there are other things out there that will assist you in getting a home with low or no down payments. Take on private mortgage insurance – typically you’ll be required to do this without a 20% down payment, but having it will set your lenders a little more at ease. You can also borrow against your life insurance policy for your down payment. Other financial avenues to consider include pensions or other retirement accounts.
Self Employment / Freelancer
Being self employed comes with a lot of perks, but ease in getting a mortgage loan is certainly not one of them. Getting a mortgage as a self employed person can be challenging, but is not impossible. Unfortunately, as a self employed person, you present a higher risk to lenders. Your best bet is to offset this risk with other positive assets and attributes of your finances.
Like those with no proof of income or no pay stubs, letters from clients may help you here. You may also qualify for a newer mortgage program called an “alternate documentation loan”, or you may qualify for a “bank statement” loan. There is a difference! With an alternate documentation loan, the income is still verified, but in different ways than normal. You may, for example, be required to show business bank statements instead of personal bank statements. A bank statement loan is a little more self explanatory.
When self employed, the interest rate you pay on a mortgage may be a little higher. Also, the process will be the same (get a rate quote, fill out an application, sign paperwork, and produce documents on demand), but you may be required to offer a little more in the way of paperwork signatures and documentation. Most lenders ask for a minimum two year record of income/earnings. If you can offer this, you’re on your way to being a self employed home owner.
Other small things you can do to offset your risk to your lender: Keep a good credit score, keep your taxes up to date, and pay down your business debt.
Did you know that whether or not you have student loans can impact your ability to get a mortgage? It’s true. Think of it from the lender’s point of view – can most people take on two huge amounts of debt at once? Probably not easily! There are other factors besides your front to back end ratios that are important when seeking a loan while also carrying student loans. The size of your down payment makes a big difference. If you can save a higher down payment, your student loans are less likely to affect your ability to get a mortgage. How much money you make is also another important factor. To your benefit, if you have student loans, you likely have a degree. If you have a degree, you qualify for higher paying jobs. How long you’ve had that job plays a factor, as well. Which leads us to…
A New Job
If you have a brand new job, or one you’ve been at for less than six months, you may have a few more obstacles than most when it comes to obtaining a mortgage loan. Unfortunately, when lenders run your credit history, they sometimes won’t accept your information unless you have at least two years of employment history with the same employer. You may be able to bypass this if you have spent at least two years in the same industry, if not with the same employer. If you’ve just graduated, you may not be able to buy a home until you’ve had a job for a few years. There are other ways around this obstacle, though! If your job switches industries from a less than stable field to a more stable field, and you do not have a history of job hopping, you may be able to appeal to your underwriter.
No matter what obstacle has been placed in front of you, there is a way around it and a path to home ownership and mortgage loan success!