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.
- Pay yourself a W2 wage rather than taking an owner’s draw from the business.
- Keep separate business and personal accounts.
- Maintain good records. Programs like QuickBooks can help owners classify and track income and expenses as well as generate profit and loss statements.
- Make a larger down payment by tapping into a 401(K) or IRA account.
- 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