Purchasing a Home While Self-Employed
Can I Buy a Home if I’m Self-Employed?
Many people have situations in life that may pose as challenging to the mortgage process, one being the self-employed individual.
Below is a general guide for the self-employed on the ins and outs of preparing for a mortgage.
The Income Challenge
In a nutshell the biggest challenge for the self-employed in purchasing a home is proving income. Mortgage companies require long-term proof of income. For the self-employed that isn’t always an easy task, as income isn’t always consistent and regular. If new to the freelancing or self-employed industry, you will need to be able to provide two years of tax returns.
With mortgages, there will be paperwork. With mortgages for the self-employed, there will be even more paperwork. The main reason for this is because the applicant has to prove income sources and large deposits in accounts. Lenders will want a paper trail to help them better assess whether or not you are qualified for a mortgage. Be patient and ready for the paperwork!
Boost Your Credit
This step goes for all mortgage applicants. Your credit rating is crucial to the mortgage process. Applicants should prepare by requesting a copy of their credit report and reading it front to back, checking for errors.
If the score is less than stellar, use these tips for raising your credit score, via Paul Sian (OH Realtor.) For the self-employed who have their own challenges to begin with, having poor credit will make the mortgage process that much more difficult. Getting on top of credit well before purchasing a house will help significantly.
Prepare With A Pre-Approval
Going into the mortgage process unaware of what is affordable in your financial position not only makes the home buying purchasing frustrating, it puts you at a disadvantage. A home seller will see you as a serious buyer with a pre-approval and will give the applicant a better idea of which price range to be searching in.
Bonus! Kyle Hiscock (NY Realtor) has written this informative article on mortgage pre-approvals.
Choose The Right Mortgage Lender
Finding a Buyer’s Agent is always important when purchasing a home. The self-employed should add finding an experienced mortgage lender to their list as well. The goal is to find one that has handled mortgages in the past for self-employed applicants. Asking around for referrals from other friends in similar positions is a great way to find one.
Calling around to lenders and discussing the situation helps as well. There is also an alternative mortgage option for the self-employed but not all lenders offer it so doing a little research is important in that aspect as well.
Bonus! Joe Manausa (FL Realtor) has provided this helpful article with 7 questions you will ask your mortgage lender.
Manage Financial Accounts
In some situations, self-employed individuals will have personal accounts and business accounts mingled together which may work temporarily but when applying for a mortgage it might raise a red flag. It is a much better tactic to have separate personal and businesses accounts. This will make the process easier for lenders to follow income trails and proving which debt is business related (some lenders may waive this) and which is personal debt.
Whether employed by a company or self-employed, debt is a major factor into whether or not an applicant gets approved for a mortgage. Any business or personal debt that exists should try to be paid off before applying for the mortgage. Know your debt-to-income ratio and take steps to make it better. Creating a debt management plan is a helpful strategy.
Bonus! Greg Hancock (SW OH Realtor) wrote this excellent article with details on debt-to-income ratio.
Deductions are taken by many people at tax time, especially the self-employed. The problem with that is mortgage lenders look at what your income is after expenses. All those deductions taken for business will lower qualifying income. To counter this, it is recommended that the self-employed try to lower their deductions for a few years before applying for a mortgage so that they will have good, solid income to show lenders.
Bonus! Anita Clark (GA Realtor) provides this helpful article on tax deductions for home buyers.
Be Open To Options
Some may go into the mortgage process expecting certain things but when self-employed it is important to know that options may change. While it may not be the most attractive option, having a co-signer, someone in good credit and with established income, may be needed to be approved for a loan. Another option if approval is proving difficult, is to simply apply for a loan in a smaller amount. Looking into smaller homes or in different less expensive areas may be a better avenue to take.
Other Mortgage Related Articles
- What is a Mortgage Pre-Approval Vs Pre-Qualification? – Luke Skar
- Must-Know Info for the Self-Employed Home Buyer – Realtor.com
- Top 10 Mortgage Mistakes to Avoid – Bill Gassett
- Mortgage Broker vs. Lender: How to Choose – Teresa Cowart