How to Prove Self-Employment Income to Buy a Home
When applying for a mortgage, lenders scrutinize your employment history to verify that you have the income and job stability to meet your payment obligations. Employment gaps, job-hopping, and unpredictable income sources make it harder to qualify for a mortgage.
What does that mean for self-employed borrowers? New clients and slow seasons come with the territory for freelancers and independent contractors. Does that mean that buying a home is off the table? The foreclosure and mortgage help specialists at Fraud Stoppers explain what self-employed borrowers need to know when buying a home.
Self-Employed Income Verification: What Do Lenders Want?
Verifying income is simple when you work a W2 job with regular paychecks, but it’s trickier for the self-employed. Two years of tax returns and signed financial statements from your CPA are the standard documentation for self-employed borrowers. Lenders want to see stable, predictable income. While long-term self-employed borrowers face few hurdles, a recent switch from W2 to 1099 income is a red flag for lenders.
Many lenders will want to see three years of income for freelancers before they consider taking you on as a borrower. Lenders also examine your debt-to-income (DTI) ratio. Because lenders examine net income instead of gross, business tax deductions may hurt your DTI, explains The Nest.
Although it’s not possible for everyone, if you are a freelancer who currently owns a home that you plan to sell, have it appraised to get a realistic estimate of how much you could invest in a new downpayment. Before they arrive to assess your home, take the time to clean up the house and tidy the kids’ rooms. While appraisers are good at looking at the bones of your home, they can be distracted by aesthetics, too.
How to Set Yourself Up for a Successful Mortgage Application
Given these standards, how can self-employed borrowers rise to the occasion and get approved for a mortgage? First, get your finances in order. As AIGA notes, separate business accounts and good accounting practices are necessary to generate the detailed financial statements lenders require. If you pay yourself via owner’s draw, draw a fixed amount on a regular schedule to present a consistent income to lenders. Owners draws are the only option for sole proprietorships.
LLC owners may elect to be taxed as a corporation. This allows you to put yourself on payroll and pay yourself a regular W2 salary. Learn more about your options regarding your business’s structure. Then, talk to a tax professional before changing your company’s tax structure.
Also, look into down payment assistance programs, especially if you are disabled, a veteran, or an emergency responder. There may be ways to balance out the uncertainty of being self-employed in one of these programs.
What if Your Business is Brand New?
Homeownership is possible even if you don’t have two years of business history. One option is by providing a larger down payment. The higher your down payment, the more flexibility you have when negotiating with lenders. Save aggressively by upping your savings rate and automating transfers to a high-yield savings account or money market fund.
If you currently own a home, you have the potential of getting a good-sized down payment from the sale of your home. You can look into renovation projects that could increase the value of your home without your wallet taking a major hit. If the return on your investment is high enough, invest in a few projects strategically. This tool may be helpful as you talk to and begin to work with contractors. You can get the 30 day free trial to understand the projected costs of your renovations before involving contractors.
You can also consider a nontraditional mortgage, also known as non-qualified mortgage. These loans appeal to self-employed buyers, but Bankrate encourages understanding the drawbacks before you commit.
Married couples may choose to leave a self-employed spouse off the mortgage and buy under the W2-employed spouse’s name. However, in some situations, a lender may look at your debt even if you’re not on the mortgage application.
Make a Plan to Achieve Your Dream
Buying a home is many people’s dream, and it can be disappointing to learn that choosing contracted work puts a crimp in that plan. The best thing self-employed borrowers can do to prepare to buy a home is start now. If you currently have a home you’ll be able to sell, then make strategic upgrades that can boost your appraisal and give you more to put down. If that’s not an option, saving up a decent down payment and looking into assistance programs can help. Plus, being able to show longer patterns of income – even when there is flux – can help establish your credibility.
If you own a home and are in danger of losing it due to fraud, contact Fraud Stoppers. We are dedicated to finding the truth and keeping people in good financial standing.
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