A blog from Pacific Mortgage Co

Self-employed home buyers: What to know

Self-employed home buyers: What to know

Self-employment is on the rise; the U.S. Bureau of Labor Statistics estimates that more than 15 million Americans are currently self-employed. Whether your office is a desk in the spare bedroom, a shared work space, or even the front seat of your pickup, self-employment offers the chance to be your own boss, create your own schedule, and build a business from the ground up.

For all its benefits, self-employment can also have serious downsides – particularly when it comes to buying a home. While it is true that self-employed people have to work harder to get a mortgage, it is not impossible. The following guide can help self-employed buyers prepare for the loan application process.

Good documentation makes the difference

The beginning of the loan process is the same whether you work for a company or own your own business; expect to start by getting a rate quote, filling out an application, and providing documentation of debts and assets.

While self-employed buyers may not have a W2 to show proof of income, debt-to-income and credit requirements remain the same. Plan to show 1040 tax returns and schedules; this can be tricky as many self-employed business owners write off significantly more business expenses than regular employees, affecting net income.

Prepare to pay more

Many lenders consider self-employed applicants to be high risk; because of this, expect to pay for a slightly higher interest rate. While it may seem like a loss at first, consider it to your benefit; a solid history of on-time payments can help you refinance in the future at a lower rate.

Five ways to improve the odds of being approved

There are several ways that self-employed applicants can improve their chances of being approved for a mortgage.

  1. Pay yourself a W2 wage rather than taking an owner’s draw from the business.
  2. Keep separate business and personal accounts.
  3. Maintain good records. Programs like QuickBooks can help owners classify and track income and expenses as well as generate profit and loss statements.
  4. Make a larger down payment by tapping into a 401(K) or IRA account.
  5. Partner with another small business. Local banks and lenders are more likely to be flexible for other small business owners.

Remember that it isn’t impossible

While being approved for a mortgage is more difficult for self-employed business owners, it isn’t impossible! Even starting at a disadvantage, receiving a mortgage on your dream home is possible through proper documentation, willingness to pay for a higher interest rate, and dedication to building a good relationship with the lender.

by Author, Dec. 12, 2018

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