Getting approved for a mortgage or other traditional loan can become a lot more complicated when you’re self-employed versus when you work for an employer. Self-employed applicants often face more scrutiny and have to meet tougher requirements to qualify for loans.
Even though you likely have more hoops to jump through as a self-employed business owner, there are ways you can prove your creditworthiness.
1. Keep Organized Financial Records
Nothing will validate your income more than accurate records. One way to keep updated records is regular check-ins with your bookkeeper. Not only will your records be kept in order, you can also have an easier time ensuring your tax return reflects accurate information.
Your tax returns are an excellent way of demonstrating to a landlord or lender how much money you make.
2. Verify Self-Employment Income
When looking for a loan, proof of income is usually required, and some financial institutions will request additional reports—like a balance sheet or income statement—which is another reason why it’s so important that your financial records are organized and accurate.
A few reports to monitor include:
- Earnings or revenue statement. This report includes all of the gross revenue you’ve brought in as a self-employed business owner for the past 12 to 24 months. This won’t include inventory, refunds, or any expenses. It’s the gross income that your business has made.
- Expense report and receipts. Add up all of your outgoing expenses for the past several years, including any big purchases for equipment, and create an expense report. You should be prepared to submit any receipts or proofs of purchase as needed.
- Profit and loss statement. A P&L statement summarizes all of the revenue and expenses you’ve incurred during a specific time.
- Balance sheet. This report lists out all of the assets, liabilities, and capital investments of the business.
Collectively, this information offers a detailed look at your income and expenses for a certain period that helps financial institutions understand your total net worth.
3. Have an Excellent Credit History
Working with any financial institution means you’ll need to provide traditional information, have a a decent credit score, and–potentially–have easily-accessible money saved in a separate savings account.
In order to build a high credit score, pay your bills on time, check your credit report regularly (and correct any errors), and try to keep your debt under 30% of your overall credit limits.
4. Create a List of Referrals
To help demonstrate your credit worthiness to a landlord or lender, consider who you can call to provide referrals.
Good referrals can include a former employer as well as others who can vouch for your dependability and responsible handling of money.
5. Pay Your Bills On Time
Consistently paying your bills on time is reflected in your credit score and your credit and repayment history can demonstrate sound financial habits.
As a self-employed individual, be prepared: you may need to overcome additional obstacles that make proving your creditworthiness—to a financial institution or individual—a more involved process than you expect.