2. Reduce your debt

When Horton’s financial institution rejected his mortgage, it pointed out that he had $30,000 in student loan debt, which made his debt-to-income ratio—the percentage of his gross monthly income that goes toward his monthly debts—unacceptably high. To fix the problem, Horton dipped into his savings and paid off more than 80 percent of his student loan debt in one go. This lowered his debt-to-income ratio significantly and cleared the way for his mortgage on a $195,000 house.

Debt-to-income ratio plays a large role in whether or not you get approved for a loan and how much you can borrow. Even if you’ve got a great credit score, you should aim to keep your debt-to-income ratio below 43 percent.

3. Keep meticulous records

Most salaried employees only have to show W-2 forms to prove their income. Self-employed workers, on the other hand, need to show a host of documents, including two years of personal and business tax returns, Schedule Cs, 1099s, K-1s, profit-and-loss statements, and two months of bank statements. And, if they pay themselves a salary, they need to provide W-2 forms from their business.

It also helps to save receipts and independent contractor agreements, because they may also support your application. “Any document that you can provide that helps underwriters see how much money you’re currently making is always helpful,” says Merkerson.

4. Separate your personal and business expenses

When lenders look at how much debt you have, they’re only looking at your personal debt, not your business debt. That’s why Merkerson advises self-employed borrowers to separate their personal and business expenses.

Ideally, you should have separate credit cards, checking and savings accounts. You should expense any business transactions, such as the purchase of a new desk or lunch with a potential client, to the appropriate account. This will simplify your taxes and help you keep track of money coming in and going out of your business.

5. Make a larger down payment

Borrowers may find that, the larger their down payment, the easier it is for them to get a mortgage. A larger contribution reduces the amount that needs to be borrowed and decreases the borrower’s chance of default, all of which looks more desirable in the eyes of the lenders. “The more you put down, the stronger your file is,” says Merkerson.

Once your finances are in order and you’ve gathered all the necessary paperwork, you’ll be in a better position to shop around for mortgages. With the right prep work, you’ll be able to get through the loan process with few surprises.

Source: chase.com