It’s no secret the path to home ownership can feel a bit more daunting and overwhelming when you are self-employed. The truth is- it doesn’t have to be! With the right preparation and approach, you can take on the process with ease. Here are our best tips to buying a home when self-employed.
Prove Self-Employment Work History
One big thing about buying a home when you are self-employed is proving your finances are stable. Mortgage lenders want to see at least two years of work and financial history proving stable or increasing income. If you don’t have two full years of history from your business, then you may still be eligible if you have work history in a relative field prior. Work with your loan officer to understand your situation!
Prove Your Income
In addition to work stability, lenders want to assure your personal income is stable or increasing. Generally, an income decrease of 20% or more is worrisome in this process. Basically, the lender is trying to assure you are qualified to repay this loan.
Prepare
Preparation is key in this process! You will need documentation for lenders to gather an understanding of your financial portfolio. Make sure to have the documentation ready to go to avoid any delays in this process. We offer a FREE, online homebuying course that dives further into documentation that you will need.
Here is a brief list of required documentation for self-employed home buyers:
- Personal and business tax returns
- All schedules that relate to those returns (for example, Schedules C, E, F, K-1, 1120S, etc.) – which schedules you have will depend on how your business is set up
- 1099s
- Profit and loss statements – may or may not have to be audited
- Balance sheets
- W-2s (for people with previous experience in the same field)
- State or business licenses
- Evidence of insurance for your business
- Customer service approval letters from current clients
- Letters from your certified personal accountant or tax preparer
- Membership confirmation to a professional organization
- Doing Business As (DBA) documentation
- Enrolled agent letter
- Online third-party verification
Decrease Debt-to-Income Ratio (DTI)
Your debt-to-income ratio is a heavy consideration in your financial eligibility. Decreasing this ratio is one of the biggest things you can do to improve your mortgage eligibility. Two ways you can do this are to increase your income, pay off your debts, or both!
Save For a Higher Down Payment
Furthermore, a higher initial down payment can balance out the instability associated with the portfolio of a self-employed. The average down payment in 2021 was 12%.* In other words, the higher the down payment the more likely you are to unlock lower interest rates.
Increase Credit Score
Credit scores are another huge consideration in providing a mortgage loan. A higher credit score can make you more likely to be eligible for a better loan! There are many ways to increase your credit score!
Separate Business Expenses from Personal Expenses
Above all make sure not to overlook intertwining business and personal expenses. These can increase your DTI ratio which is troublesome for getting a mortgage loan. By separating these expenses, you can help lower your DTI ratio and provide more clarity and explanation to the lender.
Bottom Line
The bottom line is, to prepare in advance- have your documents ready, have your finances intact, and do all you can do to improve your portfolio prior to applying for a loan. Buying a home is a very special and lucrative investment, but it is important to assure you are able and comfortable doing so. If you have any questions, then you can contact us or download our app to start your homeownership journey!
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