Working for yourself comes with plenty of benefits: you set your own schedule, pick your own projects, and can work wherever you want. But have you also given up on your chances of owning a home when you kissed corporate life goodbye? Not quite!
Getting approved for a mortgage isn’t always a straightforward process, especially if you’re self-employed. The mortgage industry favors conventional W2 employees over self-employed people because they received stable income, which makes them more likely to repay loans.
Just because you sign your own checks doesn’t mean you can’t buy a home. It may require a bit more homework and effort on your end but you can achieve your dream of homeownership. Here’s how you can buy a home when you’re self-employed.
Document everything
Mortgage lenders will require self-employed borrowers to provide documentation to prove their income. These include (but may not be limited to):
- Two years of personal tax returns
- Two years of business tax returns, including schedules K-1, 1120, 1120S (some lenders will request this information directly from the IRS so you may need to sign a release form)
- Business license
- Year-to-date profit and loss statement
- Signed CPA letter stating you’re still in business
Lenders want to verify that taking on this mortgage will not cause an undue financial burden.
Maintain a good credit score
High credit scores make the mortgage approval process easier, regardless of your type of employment. The higher your credit score, the more likely you’ll qualify for a mortgage and favorable rates. Make it a habit to review your credit report and check for accurate information. Keep your credit utilization rate (the amount of credit you used versus the amount you have available) and your debt-to-income ratio low.
Keep separate business and personal accounts
Having separate bank accounts for your business and personal finances is a smart move. If you’re purchasing business expenses with your personal credit cards, you’ll increase your credit utilization and DTI ratios, which is detrimental to qualifying.
Keeping your monies separate will also make it easier for lenders to verify the money used for your down payment. If you do use business funds, lenders will want to make sure that won’t negatively impact your business.
Reduce your tax deductions
It’s typical for self-employed people to write off as many business expenses as possible to reduce their tax bills. However, this practice can work against you when it comes to qualifying for a mortgage. While these write-offs reduce your overall taxable income, lenders determine your creditworthiness based in part on your taxable income. If you keep reducing your income with write-offs, you may only qualify for a smaller mortgage than needed. Work with your tax preparer to determine the long-term impact of these write-offs and do your best to limit them for at least a two-year period before applying.
Self-employed individuals face unique challenges when applying for a mortgage but you don’t have to return to the office in order to buy a new home. With careful documentation, you can improve your prospects of securing a loan.
SummerHill Homes builds new home communities in desirable locations throughout the Bay Area. Start your search today by visiting SummerHillHomes.com to learn more about our communities, view virtual tours, and schedule a private tour and get ready to find your new home.