What is the best mortgage program if you have a low credit score and have been self-employed for less than two years?
If you have been self-employed for less than two years and your credit score is less than perfect, the FHA mortgage program is likely your best option.
Most mortgage programs require at least two year employment history for self-employed applicants to qualify. With an FHA mortgage, an employment history of between one and two years may be permitted if you previously worked in a similar field for at least two years.
So if your current job is in the same line of work in which you were previously employed, you may be able to qualify for an FHA loan even though you have been self-employed for less than two years.
The FHA program is also helpful if your credit score is relatively low. An FHA mortgage requires a credit score of only 500 if you make a down payment of at least 10% of the property purchase price and score of only 580 if your down payment is between 3.5% and 10%. The score required to qualify for an FHA loan is lower than for other mortgage programs.
Another advantage is that FHA mortgage rates are lower than conventional loan rates. Additionally, you should not pay a higher rate because of the type of job you have or because you have a lower credit score, which is another reason for self-employed applicants to choose an FHA loan.
The table below shows FHA mortgage rates and closing costs for top-rated lenders near you. We recommend that you contact multiple lenders to confirm the qualification requirements for self-employed borrowers and to find the best loan term terms.
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Please note that when you apply for the mortgage it can also be helpful if your self-employed income has been relatively steady. Lenders typically average your self-employed income to determine the mortgage you can afford, as long as your income has been relatively stable.
For example, if you have been self-employed for a year and a half and earned $60,000 in your first full year of self-employment and $40,000 over the past six months, the lender ads those two figures together and divides by 18 months to determine the monthly gross income for your mortgage application, which is $5,555 in this example ($100,000 / 18 months = $5,555 in monthly income).
Use ourFHA MORTGAGE QUALIFICATION CALCULATORto determine the FHA loan you can afford
If your income has been steady or increasing, the lender uses the average monthly income methodology described above. If your income has been inconsistent or declining, the lender may use a lower monthly income figure to determine the loan you qualify for.
Another factor to consider with an FHA mortgage is that you are required to pay an upfront and monthly mortgage insurance premium, which are extra fees on top of your closing costs and loan payment. The ongoing mortgage insurance for an FHA mortgage is non-cancellable which means you are required to pay it as long as you have the loan.
Additionally, the FHA program applies loan limits that put a cap on your mortgage amount. The loan limits vary by county and the number of units in the property. It is important to make sure that the mortgage amount you want is less than the applicable loan limit before you apply.
If an FHA mortgage does not meet your needs you may also want to consider a bank statement mortgage. This program uses your bank statements instead of your W-2s and tax returns to determine the mortgage you qualify for and is popular with self-employed applicants.
Many bank statement mortgage programs only require twelve months of statements which makes it an appealing option if you have been self-employed for less than two months.
Review How a Bank Statement Mortgage Works
The downsides of a bank statement mortgage are that the loan terms are typically more expensive and the qualification guidelines are more rigorous. For example, you may be required to have a higher credit score which is certainly not ideal if you have experienced credit challenges.
Bank statement loans are offered by traditional lenders including mortgage banks and mortgage brokers. You can use the FREEandCLEAR Lender Directory to search over 3,900 lenders by type and mortgage program. For example, you can search for mortgage brokers in your state that offer bank statement loans.
Sources
"II.A.4.c.x. Self-Employment Income (TOTAL)." FHA Single Family Housing Policy Handbook 4000.1. Federal Housing Administration, January 2 2020. Web.
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