Securing a mortgage as a self-employed borrower can be challenging, especially when managing existing debt. Instead of focusing solely on paying off debts, restructuring and strategically managing them can improve your borrowing power while keeping your financial health intact. This week, we’ll explore actionable strategies to optimize your debt profile and prepare for a successful mortgage application.

1. Consolidate High-Interest Debt into a Lower-Interest Loan

Managing multiple high-interest debts (like credit cards) can be overwhelming and expensive. Consolidating these debts into a single, lower-interest loan can reduce your overall payments and improve your debt-to-income ratio (DTI).

• How It Works: A debt consolidation loan combines multiple high-interest debts into one loan with a lower interest rate, making payments more manageable.
• Benefit: Lenders view lower monthly obligations more favorably, which can increase the mortgage amount you qualify for.
• Action Step: Shop around for personal loans or lines of credit with competitive interest rates. If you’re a homeowner, consider using a secured loan backed by home equity to reduce rates further.

2. Prioritize Debt with the Highest Impact on DTI

Not all debts are equal in a lender’s eyes. Focus on paying down debts that have the greatest effect on your DTI ratio, such as car loans or large credit card balances, rather than smaller obligations with minimal impact.

• How It Works: Lenders calculate your DTI by dividing your monthly debt payments by your income. Reducing larger debts can significantly improve this ratio.
• Benefit: A better DTI shows lenders that you’re financially stable and capable of handling mortgage payments.
• Action Step: If resources are limited, consider making higher payments on one significant debt rather than spreading extra funds across all debts.

3. Explore Debt Restructuring with a Financial Advisor

Debt restructuring allows you to renegotiate the terms of your debts, such as extending repayment periods or reducing interest rates. This approach can free up cash flow without requiring full repayment upfront.

• How It Works: Work with creditors or a financial advisor to adjust payment terms based on your current financial situation.
• Benefit: Restructuring keeps your accounts in good standing while reducing your monthly obligations, which makes your mortgage application stronger.
• Action Step: Contact creditors directly or work with a licensed credit counselor to explore restructuring options.

4. Consider a Secured Line of Credit to Manage Short-Term Obligations

A secured line of credit, such as a Home Equity Line of Credit (HELOC), can be a useful tool to manage short-term financial obligations while preparing for a mortgage. HELOCs often have lower interest rates than unsecured loans or credit cards.

• How It Works: Borrow against the equity in your home to consolidate debts or cover other expenses, then pay it off over time.
• Benefit: By consolidating into a single, lower-interest payment, you can improve cash flow and strengthen your overall financial profile.
• Action Step: Evaluate your home equity and discuss options with a mortgage broker or lender before applying for a HELOC.

5. Keep Credit Cards Active, but Manage Usage Strategically

Closing credit accounts or maxing them out can harm your credit score, even if you’ve been diligent with payments. Strategic credit card management can help maintain or improve your creditworthiness.

• How It Works: Keep credit utilization (the percentage of available credit you’re using) under 30% on all cards.
• Benefit: Lower utilization ratios boost your credit score, demonstrating to lenders that you manage credit responsibly.
• Action Step: If paying off balances fully isn’t an option, focus on reducing utilization by spreading balances across multiple cards or requesting credit limit increases.

6. Use Business Accounts Separately from Personal Accounts

For self-employed borrowers, separating personal and business finances is essential. Mixing the two can make it difficult for lenders to assess your financial health accurately and may lead to higher perceived risk.

• How It Works: Maintain separate accounts for business income and expenses to keep records clear and organized.
• Benefit: Lenders are more likely to view well-documented finances favorably, and it makes your application process more straightforward.
• Action Step: Open dedicated business accounts and use them exclusively for business-related transactions.

Conclusion

Instead of focusing solely on paying off debts, restructuring and managing them strategically can make a significant difference when applying for a mortgage as a self-employed borrower. From consolidating high-interest loans to separating business and personal finances, these actionable steps can help you improve your financial profile and present yourself as a reliable borrower. With the right preparation, you can secure a mortgage that aligns with your goals and circumstances.