Business break

Many borrowers find sound financial management practices elusive. For those who are self employed, these practices are even more complicated than usual. That’s why individuals with fluctuating incomes must learn how to prepare for the lean times when their wallets are flush.

As if learning personal finance skills isn’t daunting enough, self-employed borrowers who need a real estate mortgage often find themselves in the reject pile for a host of reasons, including insufficient income history, credit or savings. Early preparation helps avoid this disappointment.

Ask yourself, are you saving too little? Consider allocating a percentage of income to your savings account – 10 percent is healthy – instead of a fixed dollar amount. This ensures adequate savings during high income months. Don’t forget to put aside funds for income taxes, which can chew up as much as 35 to 40 percent of your income. Consider stashing these savings in a short-term certificate of deposit. While the interest rate income won’t buy a summer home on Nantucket, at least it won’t be put to waste.

Lenders often deny loan applications because of poor – or even average – credit. While you’re building your nest egg, make sure you pay your bills on time, all the time. Don’t use more than 40 percent of your total outstanding credit lines, and pay more than the minimum every month (in full if possible). Don’t apply for too much new credit at one time, but don’t close your old, unused lines. Believe it or not, those actions actually hurt your score and may negatively affect a loan application.

Finally, avoid applying until your history is pristine. Plan for a substantial down payment – at least 15 percent – as well as a vigorous financial screening process that includes at least two years of income, savings and income tax scrutiny.