How to Be a Better Loan Candidate

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on July 16, 2012 in Finance
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Taking out a loan, especially a mortgage, when you’re self-employed is hard. Because lenders see self-employment income as risky and unpredictable, the lending standards are a lot harsher for us than for other workers.

Before the mortgage crisis, freelancers had an easier time getting major loans. Many banks offered “no doc” or “low doc” loans that required little to no income documentation.

Now, you can expect to show two to three years of tax returns, bank statements, and maybe even client contracts to get approved for a loan. Banks want to be certain you can actually afford to repay what you borrow.

Here are a few things you can do to be the best possible self-employed loan candidate.

Improve your credit score

Credit matters much more for self-employed workers, since we don’t have a “reliable” source of income. Check your credit score (via myFICO.com) several months before you start loan shopping to see where you stand. Above 720 is best, but you can probably be approved with a score above 660 if you’re stellar in all the other areas. (Lower credit scores typically result in higher interest rates.)

Two good ways to improve your credit score are to pay off past due balances and to make timely payments on all your other accounts.

Make a big down payment


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The more you can put toward your purchase – whether auto or loan – the smaller the loan you’ll need. Making a down payment of 20% or more greatly improves your chances of being approved.

Have several months of loan payments in a savings account

Lenders will feel more comfortable giving you a loan if they know you have some financial reserves. Of course, the money will come in handy if you face an income shortage and you’re unable to make loan payments for a period of time.

Pay off other debt

If you’re already spending a lot of money on debt each month, then you’re less likely to be approved. With a mortgage, your housing expenses plus other debt payments would ideally be less than 36% of your monthly income. Only 28% of your income should go toward mortgage-related expenses, leaving 6% for student loan, credit card, auto loan, and other debt payments.

Increase your taxable income

You don’t have to make more money to achieve this, but you will have to pay more taxes. Naturally, you want to take as many tax deductions as possible to lower the amount of income tax you pay. Unfortunately, the same low income that eased your tax burden can keep you from buying a home. Take fewer tax deductions a 2-3 years before the big loan, then go back to regular deductions.

Get a cosigner

Getting a loan with someone who has standard employment will improve the chances of approval. The co-applicant should also have a good credit score and low amount of debt, too.

The bright side of cosigning is that using both of your incomes may allow you to qualify for a bigger loan. The downside is dealing with the joint loan if the two of you decide to dissolve your relationship.

Talk to the lender before making an application to find out whether they typically give loans to self-employed workers. That way, you can narrow down your applications to the most-likely lenders.

If you've been approved for a loan based on your freelance writing income, share some tips!

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LaToya Irby is a full-time freelance writer and a graduate of the University of Alabama. She primarily writes about personal finance, freelancing, and other self-employment topics.

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1 Comment

  1. Amandah July 17, 2012 Reply

    Great article!

    Pay off credit debt ASAP! Try to use cash vs. credit whenever you can. Besides, if we don’t use cash and coins, they could become extinct. Do we really want that?

    Shop around for the best interest rate and READ the fine print. If you don’t understand something, ask for clarification. Also, don’t forget about your local credit unions. The interest rates are usually lower than banks.

    I disagree that people now need to have at least 720 (I would use 650). Most people didn’t realize what they were signing years ago when they bought a house. It’s not fair to penalize people who weren’t educated about economics and finance and money management. Maybe if we taught these subjects ‘the right way’ in our schools, the U.S. economy and people wouldn’t be struggling right now. Maybe if we’d go back to valuing quality products/services instead of looking for the ‘cheap and free,’ our economy would be stronger. Example…if a client pays $10 for an article that’s poorly written or plagiarized, they’ll have to find a quality freelance writer to clean up the mess. It makes sense to pay NOW vs. paying LATER. That’s my soapbox for today. :)

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