Getting a loan and buying a house when self-employed can be difficult. Unlike employed workers, business owners and freelancers face different challenges when applying for a loan. But it’s not impossible. In fact, lenders usually look for the same requirements regardless of where you work!
Tips for Buying a House When Self-Employed
However, applying for a loan while self-employed takes more preparation. There is a lot of work that needs to be done beforehand before you can settle into your dream home. In this article, we’ll share 6 different tips for buying a house as a self-employed worker or business owner.
Don’t rush into a loan
Your income and employment history are crucial to getting a loan from a lender. Most lenders want to see at least two years of income, which can make it difficult for young business owners. Although you may have made a lot of money, consistent income is more important than the amount.
A bank is making a long-term investment in you by offering you a loan. They want to make sure that they aren’t making any financial risks. Therefore, it’s crucial that you work in your business for at least two years before applying for a loan.
Have the proper documentation
The loan process doesn’t differ too much between company-employed and self-employed applicants. The main difference is the type of documentation you need to provide. Because you won’t have a W-2 form, you’ll need to show different proof of income. For a self-employed person, this can be your past tax forms, profit and loss statements, or even bank records. You may also be required to show other documents like your business license, insurance, and receipts.
Remember, the important factor is showing your net income (after write-offs). Lenders will mostly be looking at your debt-to-income ratio (DTI) to see if you can afford a home.
Reduce your deductions and debt
Self-employed workers can write off expenses to lower how much they pay in taxes. But as we mentioned, lenders will want to see your taxable income before they qualify you for a loan. The more money you write off, the less qualifying income you have to show to the bank. Therefore, it might be worth waiting on those expensive business investments and purchases until you have a loan.
In addition, you should also look at minimizing your DTI. A low DTI will make you more attractive as a buyer, which could increase your chances of buying a house. As a rule of thumb, your monthly spending should not exceed more than 43% of your monthly income.
Increase your credit score
Your income and employment history aren’t the only things lenders will be looking at. Your credit score is also crucial when buying a house when self-employed. Not only will this help you with your loan amount, but it could also decrease your interest rate.
Generally speaking, your credit score should be at least 600 to obtain a loan. You can increase your credit score by taking out microloans and paying debt on time.
Supplement your income
Not sure how to buy a house when self-employed? To start, you’ll need to put down money as a down payment. For most lenders, this is around 3%. However, the more you put down, the lower your loan and mortgage will be. Even if you’re running a successful company, you can still supplement your income to increase your savings.
Talk with a loan officer early
Preparation is key if you want to know how to buy a house when self-employed. Working with a loan officer early in the process can guide you to make the right financial decisions. We recommend chatting with a professional at LoanDepot. They can answer your questions about the process and help you with your first mortgage.
It’s also worth asking about home insurance. Providers like Smart Financial can help in case your home gets damaged. Home insurance can also protect your personal belongings in case of fire, theft, or water damage.
More Financial Resources
Buying a house when self-employed is a big decision. But it’s comforting to know that you go through the same process just like everyone else! Start by preparing early and by getting in control of your finances. We recommend reading a couple of finance books or taking a finance course to help with the home buying process.
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