What Every Self-Employed Veteran Needs To Know About Qualifying For VA Home Loans
Becoming a homeowner has long been an American dream that many are able to fulfill. For veterans, the ability to secure a mortgage is made easier with VA home loans. However, self-employed veterans may find it more difficult to get approved for mortgages, even through lenders who offer VA home loans. If you are a self-employed veteran, here are several things to keep in mind before you start the process of getting a mortgage.
Be careful of what you deduct when filing your taxes
Those who are employed provide W-2s as their proof of income. Since you are self-employed, you don't have this ability. Therefore, you will need to show your tax returns and schedules for proof of income when applying for a mortgage. Most people who are self-employed take business deductions and write-offs that reduces their taxable income, which is the figure that lenders who to determine the debt-to-income ratio and the financial means of being able to make mortgage payments.
When you write off business expenses, the net income shown on your tax return doesn't reflect your true income. If your tax returns don't show a substantial enough income, your mortgage application may be rejected or you may only qualify for a lower amount than you would qualify for if you didn't take the write offs. If at all possible, try to write off fewer expenses on your tax returns before submitting a mortgage application.
Keep your business credit separate from your personal finances
If you don't keep your business and personal finances separate, you could be risking your credit score. This is particularly true if your business needs to have hard credit inquiries pulled, which could affect your ability to secure a mortgage. Lenders don't like seeing multiple hard credit inquiries and high credit card balances, such as when construction contractors apply for loans on heavy equipment vehicles or use their personal credit cards to pay for expensive equipment.
Obtain a credit card for your business to help you keep your business separate from your personal finances. Most business credit cards require personal guarantees but some cards do not report to consumer credit bureaus, some only report to commercial credit bureaus, and some don't report to any bureaus. If you are unsure of which business credit cards to apply for, consult with a free non-profit financial service for veterans.
Don't do anything that could change your credit score during the process
After you've taken the time to improve your financial situation, the last thing you'll want to do is to change your credit score during the process of getting a mortgage approval. The reason for this is because many lenders pull credit reports a second time right before closing, especially after some time had passed since first applying for the mortgage. Your credit rating can lower if you apply for other loans or credit cards after you submit your mortgage application.
Lenders don't like seeing lower credit scores within a short time period as it can be a red flag that you are trying to take out more credit than you will be able to afford making payments on. For example, a new car loan would change your debt-to-income ratio and a new credit card may mean that you would have an additional financial obligation that wasn't known at the time of the initial credit report pull.
Of course, be sure to pay all of your bills on time during the process as well, so you don't risk having a creditor place a negative mark on your record which would lower your credit score. That way, your mortgage application won't be at risk of getting denied or your interest rate increased heading into closing.