September 20, 2019

Home Loans for the Self Employed: Are You Ready for Home ownership?

You’ve built your own business from the ground up. It’s one of the many things you consider your pride and joy. You often dream of looking out of your office window, at your yard, and your home. But are you really prepared for home ownership? Many self-employed individuals look at home ownership as a way to avoid putting money in their landlords’ pockets and instead putting it toward building a mortgage and in turn, building equity in their own place

But before you take the plunge, it’s important to understand how home loans for the self employed work. Before you choose to buy a home, consider the following:

Your Income Must Be Consistent

Being able to pay your mortgage on time isn’t just a sign of financial stability. It’s the law. A mortgage lender can initiate the foreclosure process in as short as the time frame as a single missed payment or two, so it’s definitely not something you want to make a habit of. Even if you’re thinking about applying for home loans for the self employed, it’s important that you have consistent and reliable income coming in and that you have a way to document this, by way of your bank statements, for example.

You want to be able to demonstrate to lenders that your finances are reliable and that you have a constant stream of ongoing income coming in. If you’ve just switched jobs or had a drop in income, it may be worth waiting a bit before you elect to purchase a home, since these can be red flags when you’re trying to get a home loan.

Check Your Credit

Your credit score and credit history all affect your ability to buy a home. Having good credit means you’ll pay less in interest, even if you pursue home loans for the self employed. You may also have a lesser down payment to put down on your home if your credit is better. Average credit doesn’t mean you’re out of luck, but it does mean you may pay more. Ideally, you’ll want to work on your credit to get it as good as it can be before you move forward with buying a home.

A few percentage points may not seem like they make much of a difference, but over the course of a 15, 20 or 30 year mortgage, they definitely can add up to thousands of dollars, so do what you can to improve your credit if it’s not as good as it could be.

Can You Properly Care for the Home?

Home ownership means more than just paying your mortgage. You’ll need to do regular maintenance as well, which can include lawn and garden care, repairs, changing out filters, spraying for bugs and more. Unless you have the extra funds to pay a specialist to handle these things for you, they all fall on you. If you’re swamped with work and don’t have time (which can be a great thing), or you just don’t want to deal with the hassle of upkeep, you may be better suited for renting.

Getting Started with Home Loans for the Self Employed

If you’ve read this far and you’re ready to put in the time, money and effort that comes along with home ownership, then congratulations, you’ve taken the first step forward with confidence. The next step is finding out what your options are in terms of home loans. And although there are not specifically home loans for the self employed set aside, you may be able to get a lower interest rate if you’re able to use your self-employed income to make a larger down payment on the home, or if your credit is good and your income stable and regular.

All of these things show lenders that you are not only responsible, but a safer bet to lend to than someone with poor credit, flaky income and other red flags. If you’re in a stable position to buy a home and you’re planning on staying where you are for awhile, home ownership could be the right choice for you.

With that being said, it’s a big step and not one that you want to take lightly. To learn more about what loans are available for the self-employed and what options you have available to you, give us a call. We’ve worked with thousands of self employed individuals and understand your unique needs in getting financing for your home purchase.

July 30, 2019

Home Equity Lines of Credit: Putting Your Home to Work for You

As a homeowner, you’ve already put in the hard work to purchase a home. Between the long search, multiple showings, contract agreements, inspections, and finally closing on the property, you’ve earned the right to say that your home is yours. But with homeownership comes the associated task of maintaining your property. Without a landlord, all the maintenance, repairs, and upgrades are your responsibility. That responsibility includes the added cost of paying for contractors and materials.

Unfortunately, those costs often come at the least opportune times. Right after you’ve closed on the house, your liquidity has vanished with the required down payment, and large expenses don’t always wait until you’ve had a chance to recoup your emergency fund. The good news is that there’s a solution: a home equity line of credit (HELOC). Getting a HELOC can return you to a position where you can have the funds you need to pay for repairs, debt consolidation of high-interest loans, or even a much-needed vacation.

The Process of Acquiring a Home Equity Line of Credit

You’ll be happy to hear that it’s a lot easier to get a HELOC than buying a house in the first place. There are two major considerations to determine your eligibility and the size of your credit: the loan to value ratio (LTV) and the combined loan to value ratio (CLTV). As the names suggest, these two concepts are closely tied together, so we’ll examine each of them in turn.

The LTV is determined by taking the assessed value of your home and comparing it to the outstanding amount on your mortgage. Many firms use 80% as a cutoff point, so if you have a $200,000 house and owe $170,000, you may have difficulty finding a HELOC. If you only owe $100,000, however, your LTV is 50% and you will have a much easier time securing a HELOC.

CLTV takes the LTV and compares it to the banks’ HELOC limit. In most cases, this will range from 80-85%, so the difference between that number and your LTV is your CLTV. To use the example from above with a home valued at $200,000 and a remaining mortgage of $100,000, you would likely see a HELOC offer of up to $60,000, bringing you to an 80% CLTV.

What Makes a HELOC Desirable Compared to Other Loan Options?

You likely recall that you were able to acquire home loans in Los Angeles long before you bought a house, whether using a credit card or signing an unsecured personal loan for short-term expenses or debt consolidation. In most cases, a HELOC is a stronger option than what you could acquire without the value of a home to secure it. To put that in direct comparison, your credit cards can range from 16-28% interest, while an unsecured loan may fall in the 9-16% range depending on your credit and obligations. A HELOC, on the other hand, may be in the 3-6% range depending on your credit and CLTV.

The math is not always so straightforward when it comes to other secured loans, however. Look carefully when you plan to use a HELOC to purchase a new vehicle, as you may find better rates with an auto loan secured by the purchased vehicle.

Stay Informed: Know the Risks

The reason your HELOC will be low interest is that it is a second lien against your home. You can secure low monthly payments by opting for a term extending five, 10, or even 15 years, but if you ever default, then your home is at risk for foreclosure. Take the time to discuss this with your financial adviser to see if this risk is worth the benefits.

Ultimately, deciding to open a HELOC is a decision that you must make for yourself. It can often reduce your interest payments compared to other loans, and the interest you pay on it will itself be tax-deductible, so there are significant financial benefits to choosing a HELOC compared to an unsecured loan. Nevertheless, the risk is real if you default on the loan, so take some time to determine if this is right for you.

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