Four Tips for Self-Employed Homebuyers
Self-employed? You may have to be more prepared than the average person.
There’s no doubt that there’s been a significant increase in self-employed workers since COVID struck two years ago. But what those self-employed people may not know is that “being your own boss” may lead to trouble when it comes to buying a home.
Here are a few tips on how to get approved for a mortgage as a self-employed worker.
Documentation is Key
Every homebuyer has to provide a significant amount of documentation when getting approved for a mortgage. But the difference between traditional and self-employed workers is the W-2 and the 1040 - that’s where it gets tricky.
As a gig or self-employed worker, you can write off more expenses than the traditional W-2 employee, which decreases your taxable income. So while the debt-to-income ratio is the same for both W-2 and 1040 homebuyers, self-employed buyers could have a more challenging time qualifying for a mortgage.
As we approach tax season, consider that lenders look at the two last tax years. Maybe you need to boost your average income and write off less for 2021?
After write-offs, the essential thing is to show a net income that meets the debt-to-income ratio your lender prefers. For conventional mortgage loans, it’s usually 31% to 42% but make sure to discuss it with your lender.
Make Your Side Gig Official
Making your business legal is a great way to present a strong mortgage application. Make sure to register and license your business, pay yourself as a W-2 employee through a payroll system, and keep separate accounts for your business and personal expenses.
Above all - make sure to maintain good records. Lenders will often ask for a profit and loss statement. So tracking and correctly classifying your business expenses and income is essential.
Submit a Strong Application
Remember that debt-to-income ratio I mentioned? It’s often a “make or break” for self-employed home buyers. Before buying, try lowering your debt load or making a larger down payment. Remember - you want to submit the strongest application possible to improve your approval odds.
Remember, It’s Not Impossible
Being self-employed might put you at a disadvantage as a homebuyer. But the good news is that there’s hope! As your REALTOR®, I’ll connect you with great local lenders with ample experience with self-employed buyers.
And remember, getting approved for your mortgage as a self-employed buyer is difficult but not impossible!
