What Is a Self-Certified Mortgage

A self certified mortgage is specifically designed for people
who do not have a steady income or cannot easily verify their income.
Acquiring a mortgage in today’s economy is a challenge even under the
best of circumstances but if you are unable to verify your income, you
will definitely not qualify for a standard mortgage. Fortunately, a self
certified mortgage does not require the same documentation as a
traditional mortgage and offers potential homeowners another mortgage
option.

Who Is a Self Certified Mortgage For?

A self certified mortgage is a loan developed for people who own
their own businesses or self-employed. This includes contractors,
freelancers, commission based workers and people that have multiple
sources of income. It can be challenging to prove income for these types
of workers due to the following reasons:

  • Because they often do seasonal work.
  • They have poor bookkeeping practices.
  • They fail to keep copies of receipts.
  • A worker that is paid based on commissions or tips cannot prove
    steady income.
  • Even if you are able to produce your tax records and accounting
    receipts, your tax preparer has likely reduced your adjusted gross
    income by using every available expense. This will cause your taxes
    to not show an accurate picture of your full income.

What Qualifies for Income Proof to Get a Self Certified Mortgage?

self-certified-mortgage

Although
it isn’t necessary to submit your paycheck stubs or bank statements to
prove your income for this type of loan, your lender will still require
some type of guarantee of income. Some of the more common requested
forms of proof are:

  • References from landlords to demonstrate your ability to pay for
    living expenses.
  • Bank references for all of your accounts including checking,
    savings and loans.
  • A letter from your tax preparer or accountant stating your
    actual income.
  • Your lender will also run a credit check, so be sure to reveal
    everything.

Even though a self certified mortgage will provide a self-employed
borrower with the advantage of not having to present the typical
documents required, you will still have to meet at least some of the
above requirements to obtain the loan. It’s likely that finding a self
certified mortgage will be difficult to find because of the economy but
if you are having trouble finding a lender, try a mortgage broker.

A good mortgage broker will have many contacts within the self
certified mortgage lending industry and will have better luck finding
you the best available mortgage. This is especially true if you have
poor credit or are having trouble establishing your income. It may be
helpful to contact a FSA authorized mortgage broker because they have
impartial information and will help you to make an informed and educated
choice.

Is a Self Certified Mortgage Loan the Right Loan for You?

As with any mortgage, you need to go over your budget and evaluate
how much you can afford to borrow. Lenders will often lend up to five
times your income level but that doesn’t mean you should necessarily
borrow the maximum amount. Remember to take into account unexpected
expenses that may come up or any change in earnings that could
jeopardize your payment ability. Leave yourself some breathing room in
your budget because you never know when something unexpected will
happen.

Money Down and Interest Rates

Most borrowers will ask for 20% to 25% down for a self certified loan
but there are some that will go as low as 10% of the total property
value. Not only should you consider the length and amount of your loan
when considering how much of a down payment you can afford, but you
should also think about how that amount will affect the interest rate of
the loan.

Since this type of loan is considered to be a slightly higher risk
loan compared to other mortgages, you can expect higher interest rates
and some additional fees and cost. To minimize the cost of interest
rates, start with a bigger down payment if you can afford it. A down
payment of 35% versus a down payment of 10% will definitely make a huge
difference in the interest rate you are offered and can take thousands
of dollars off of the total amount of your loan.

It’s also important that you have a good credit score to keep your
interest rate low. You should always keep an eye on your credit score
but especially start checking your credit reports at least a year before
you begin the loan process so you have time to remove any incorrect
information.

With interest rates extremely low right now, it may be wise to choose
a fixed interest rate if you are in it for the long haul. If you do
choose a variable interest rate, make sure it has limitations such as
never jumping more than 2% over the life of the loan. Otherwise, you
could end up with an enormously high interest rate if the market changes
and interest rates sky rocket.

It’s also important to ask about any loan options that will allow you
to make additional payments, interest only payments or skip a payment
all together. This can be important because some loans have strict
limitations on how payments are made and could inhibit your ability to
resell your home or pay it off early.

Making a Sound Mortgage Decision

Once you have evaluated everything from your budget, interest rates,
down payment, credit score, loan choices and lender choices, it’s time
to make yourself certified mortgage choice. Remember to utilize a good
mortgage adviser to help you find the best deal for you as they will
have more options available to you. Take your time making yourself
certified mortgage decision because a loan of this size will have long
term effects on your finances.

Potential Mortgage Changes on the Horizon

With large numbers of homeowners defaulting on their mortgages, there
is a push to make changes in lending practices. The changes being
recommended will require complete verification of any borrower’s income
and there will be no more loans without proof of income.

The goal behind the potential changes is to make the lender
responsible for evaluating a potential homeowner’s ability to make
payments and stop the use of loans that homeowners only pay interest on.
In other words, to allow all borrowers the opportunity to manage a
mortgage they can actually afford.

Make a Sound Certified Mortgage Decision

You should never rush into a loan or a self certified mortgage
decision. Take your time and think it through. Do your homework and
check out potential lenders. This is likely a lifetime purchase and you
want to make sure it’s a successful transaction with the terms you
require to make it work with your budget and life circumstances. If you
follow through with these precautions when choosing your self certified
mortgage, you can relax and enjoy your new home for the rest of your
life.