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Mortgage  Question?
Low down payment mortgage for self-employed borrowers

I am self-employed and have a high debt-to-income ratio. I have $20,000 for a down payment, excellent rent history and my business tax returns are better than my personal returns. I want to buy a $400,000 home but am worried about the payment. What are my mortgage options? Help me!!!

Harry Jensen, Trusted Mortgage Expert with 45+ Years of Experience
, Trusted Mortgage Expert with 45+ Years of Experience

Your situation is challenging for three reasons: 1) you are self-employed; 2) you want to make a low down payment (less than 10%); and 3) your debt-to-income ratio is high. We cover each issue below and offer recommendations on how to handle these challenges when getting a mortgage.

1) Self-Employed Borrower. It can be challenging for self-employed borrowers to obtain a mortgage as banks require additional documentation and apply different underwriting guidelines. We provide a helpful explanation on How to Get a Mortgage If You Are Self-Employed on FREEandCLEAR. The key for self-employed borrowers is to make sure that you provide the lender with documentation such as personal and business tax returns that verify your income history over multiple years. Lenders want to see a track record of consistent income generation from your self-employment. Additionally, you mentioned that the income reported on your business tax returns (form 1120) is greater than the income reported on your personal tax returns (form 1040). In some cases, lenders will use the higher two-year average income from your business tax returns (form 1120) instead of the income from your personal tax returns (form 1040). Lenders that are willing to do this typically require a written explanation that explains the difference in income figures. Underwriting guidelines on this point vary by lender so you should speak with multiple lenders to understand how their underwriting policies apply to you.

2) Low Down Payment Borrower. There are multiple mortgage programs that enable you to buy a home with little or no down payment. We provide a comprehensive summary of these programs as well as a helpful comparison of no / low down payment programs on FREEandCLEAR. Each program has different borrower eligibility and qualification guidelines and I recommend that you review the resources on FREEandCLEAR to better understand how the programs work. Based on the limited information you provided I think the FHA Mortgage Program and Fannie Mae HomeReady Mortgage Program are most applicable to your situation. Both of these programs enable you to purchase a home with a down payment of 3.5% or lower and permit higher debt-to-income ratios than other no / low down payment mortgage programs, under certain circumstances. Please note that the FHA Mortgage Program has no borrower income limit while the HomeReady Mortgage Program may apply an income limit, depending on where the property is located.

Borrowers usually prefer the low / no down payment programs we summarize on FREEandCLEAR because they enable them to buy more home with a smaller down payment. However, if you are concerned about the larger mortgage and monthly payment that these programs afford borrowers then your alternative is to buy a lower priced home. For example, with $20,000 you could make a 10% down payment on a $200,000 home and a 20% down payment on a $100,000 home. Making a larger down payment as a percentage of the property purchase price potentially makes more conventional mortgage programs available to you, which can reduce your interest rate, closing costs and potentially eliminate mortgage insurance. A smaller loan amount also results in a lower monthly payment which addresses your debt-to-income concerns.

3) High Debt-to-Income Ratio Borrower. The feasibility of qualifying for a mortgage with a high debt-to-income ratio depends on your specific financial profile and ratio. The FHA and Fannie Mae HomeReady mortgage programs allow higher debt-to-income ratios but require borrowers and lenders to provide additional documentation to support using a higher ratio. Lenders may have internal debt-to-income ratio limits that are below the limits permitted by these programs so you should contact multiple lenders to understand their debt-to-income ratio policies, which vary. When you speak to lenders ask about their "manual" underwriting process which may allow them to use a higher ratio.  Your rent payment history may also be helpful in addressing this point so be sure to reference it in your discussions with lenders.

Based on the information above, we recommend that you contact three-to-four lenders to understand how they would handle your unique situation. When you contact lenders be sure to ask about their self-employed borrower qualification guidelines and determine if they offer the FHA and HomeReady mortgage programs. To review lenders in your area click INTEREST RATES You can also use our Personalized Mortgage Quote function to receive free, no obligation mortgage quotes from up to four lenders.

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About the author

Harry Jensen, Mortgage Expert

Harry is the co-founder of FREEandCLEAR. He is a mortgage expert with over 45 years of industry experience. Over his career, Harry has closed thousands of loans for satisfied borrowers and now offers his advice and insights on FREEandCLEAR. More about Harry

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