Whether you need money to buy a car, consolidate some bills--or you have finally found your dream home at a price within your budget--sometimes you need to borrow money. For many of us, the loan process is straightforward--we simply provide credit and asset information along with pay stubs and a W-2 to verify our earnings. What about those of us who are self-employed? What do we need to know about getting a loan as a self-employed borrower?
Traditional Loan Options Still Exist. Self-employed borrowers often have the same loan options through many banks, lenders such as Associates Home Loans, and credit unions as borrowers with conventional employers. Lenders evaluate credit scores, income, and assets in the same ways for both types of borrowers. Self-employed borrowers are still able to finance large ticket items such as cars and homes--and rates, requirements, and fees follow much of the same guidelines. Self-employed borrowers often need to offer up more documentation to prove creditworthiness. With good credit and steady, verifiable income, many traditional loan options are available to self-employed borrowers.
Loan Documentation for Self Employed Borrowers is A Bit More Complicated. While self-employed individuals have the same loan options as traditionally employed workers--they usually have more application requirements to move their loan applications along. Self-employed applicants will not have weekly paystubs, or straightforward W-2's for lenders to quickly scan and process. Instead, self-employed loan applicants will need to verify earnings with full tax returns, profit and loss sheets, and bank and investment statements. Keeping separate personal and business accounts simplify the application process--but, even that isn't entirely necessary for self-employed borrowers. Self-employed borrowers should plan to provide lenders with at least two years of earnings and financial records to document income.
Self Employed Borrowers May Have More Explaining to Do! Sometimes the profits and losses for a given year or the bank account balances do not tell the entire story for a self-employed borrower. Sometimes credit report mistakes happen, or an economic downturn or unexpected accident or life event caused missed payments or negatively impacted credit scores. For self-employed borrowers showing substantial deductions to income, inconsistent profits or losses or unusual banking deposits or withdrawals--lenders may accept letters of explanation to tell the stories not reflected in the numbers on the statements and accounts. If there were unusual circumstances during a given time that caused negative credit marks or sharply reduced income that are no longer present--written explanations from the borrower may be needed to explain exceptional circumstances to lenders. These explanations sometimes allow lenders to make exceptions for self-employed borrowers who may not immediately qualify by the numbers alone.
Self Employed Borrowers May Need Secured Loans or Co-Signers--or Work to Improve their Credit Score. Credit scores are a vital factor in determining your loan eligibility. Self-employed borrowers may need to pay off some debt before taking on new financial obligations--or clean up old credit problems like civil judgment filings or collection activity. Even if you have less than perfect credit or inconsistent income, you may be able to obtain a traditional loan with the help of a co-signer or a secured loan based on collateral you already possess. Talk with your lender about ways to improve your credit rating or steps that you can take to qualify for the loan type you are requesting.
You May Need to Look at Non-Traditional Loan Options. If you do not qualify for a personal loan--you still have other options. If you are a homeowner, you may be able to be eligible for a home equity line of credit. Accepting a new credit card or using the cash advance option on an existing credit card may help if you need a short term loan for a small purchase. In essence, it is just important to pay these credit card obligations as agreed to maintain or even boost your credit score. With time--and timely payments--your credit rating and income situation may improve enough to qualify for a traditional loan.
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