When determining borrowing capacity for self-employed individuals, lenders will typically look at the following factors:
- Income: Lenders will look at your income over the past two years to determine your borrowing capacity. This includes your net income, which is your gross income minus any expenses related to your business. Lenders may also look at your income projections for the upcoming year.
- Expenses: Lenders will also consider your business expenses when determining your borrowing capacity. This includes expenses such as rent, utilities, and equipment costs.
- Credit score: Your credit score plays a significant role in determining your borrowing capacity. A higher credit score typically means you’ll qualify for a larger loan amount, while a lower credit score may limit your borrowing capacity.
- Loan-to-value ratio (LTV): The loan-to-value ratio is the amount of the loan divided by the value of the property. Lenders will typically limit the LTV to 80%, meaning you’ll need to make a down payment of at least 20%.
How much can a self-employed individual borrow for a home loan?
The amount that a self-employed individual can borrow for a home loan will vary based on their income, expenses, credit score, and loan-to-value ratio. However, there are a few things to keep in mind:
- Lenders typically require a debt-to-income ratio (DTI) of no more than 43%. This means your total monthly debt payments, including your mortgage, should not exceed 43% of your gross monthly income.
- The loan amount will be limited by the value of the property. Lenders will typically limit the loan-to-value ratio to 80%, meaning you’ll need to make a down payment of at least 20%.
- Self-employed individuals may be able to borrow more if they have a high credit score and a strong financial history.
