The Self-Employed Person's Guide to Getting Credit


You work for yourself. And most times, that's great. But when you're trying to qualify for a mortgage loan or apply for a credit card, it can be a real struggle.

That's because lenders prefer loaning their dollars to borrowers who have a steady income that stays the same each month. That isn't what happens with most people who are self-employed. Your income can rise one month, and fall the next.

There is good news, though: Plenty of people who work for themselves finance homes and cars, and plenty have credit cards in their wallets. How can you join their ranks? Here are four tips for convincing lenders that just because you're self-employed doesn't mean you're a risk to default on your loans.

Prove That Your Income Has Been Steady for Years

It's far easier to qualify for financing or credit cards if you can show lenders that the income you've made as a self-employed worker has been steady or rising each year. If lenders see that what you made last year was similar or better to what you made the year before, they'll be less nervous about loaning you money.

To prove that your income is consistent, you'll have to provide lenders with at least the last two years of your income tax returns — returns that should show that your income during these last two years did not swing wildly up or down.

What if you haven't been working for yourself long enough to show at least two full years of self-employed income? Or what if your self-employment income hasn't been consistent and has soared high and fallen low? You'll struggle to qualify for a loan. It might be best to wait until you can show those two consistent years of income before applying.

Build a Top Credit Score

Your FICO credit score is a key number when applying for a loan or credit card. It's especially important for self-employed borrowers, who can rely on a high FICO score to help lessen the anxiety lenders often feel about loaning money to those who work for themselves.

Lenders today consider a FICO score of 740 or higher to be an excellent one. Such a score shows that you have a history of paying your bills on time. Such a history can put nervous lenders at ease and improve your odds of qualifying for a credit card or loan. (See also: Best Credit Cards for People with Excellent Credit)

Building a good credit score is simple: Pay your bills on time and pay off as much credit card debt as possible. Just don't close a credit card account after you've paid it off. That can actually hurt your credit score. (See also: 7 Ways to Increase Your Credit Score Quickly)

And if your FICO score is low? You might need to wait until you build it up to apply for a loan. Being self-employed and having a low score is no way to convince lenders that you're a good risk.

Build Your Savings

Lenders like all borrowers to have plenty of money saved. This way, if these borrowers should suffer a financial crisis, such as a job loss, they'll have some reserves to make at least a few mortgage or auto loan payments until they can resolve their financial struggles. Having cash reserves is especially important for self-employed borrowers. If you can show lenders that you have money in the bank, they'll be less nervous about the prospects of your self-employment income suddenly drying up.

How much savings you should have varies by lender. But most lenders want at least two months of mortgage payments saved up. If you're self-employed, saving even more than this can only help your efforts to qualify.

Come Up With a Larger Down Payment

If you're applying for a loan, coming up with a bigger down payment is one way to convince otherwise reluctant lenders to work with you. Lenders like to work with borrowers who have what they call "skin in the game," meaning that they are willing to invest more of their own money upfront when financing a home or car.

Consider applying for a mortgage loan: It's possible, depending on lender and loan program, to qualify for a mortgage while putting down just 3% of a home's final purchase price. If you're self-employed, though, you might have better luck convincing lenders to work with you if you can come up with a down payment of 10% or 20% of a home's down payment. Lenders think you're less likely to stop making mortgage payments if you've already invested more of your own money into the home.

Are you self-employed? Have you struggled to find financing?

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