Buying a Home When You're Self-Employed

As of August 2022, there’s over 9.6 million people in the U.S. that are self-employed according to the U.S. Bureau of Labor Statistics

"Earning income directly from one's own business, trade, or profession rather than as a specified salary or wages from an employer" is the Merriam-Webster definition of being self-employed. Freelancers including graphic designers and writers, as well as social media influencers, travel bloggers, photographers, food truck owners, farmers, and other independent contractors, could all be considered self-employed people.

Applying for a mortgage when you work for yourself may seem daunting, but you’re pretty much going to be following the same procedure as everyone else. You’re also not restricted to a particular loan type just because you’re self-employed. The biggest obstacle that you might face is unexpected paperwork requests. That’s because we’ll need to verify your income, which can be slightly more challenging if you’re not a W-2 employee. However – it should not discourage you from buying! Our team is more than happy to walk you through this process.

How do we qualify your income?

To qualify you, we’ll take your business income and subtract any related business expenses. You should have at least a two-year history of income. To determine your average monthly income, the past two years income will be averaged collectively and divided by 12.

What do we need from you?

The following are items that may be needed during the application process:
  • Copy of driver’s license, U.S. residency card or government issued I.D. 
  • Addresses for rental or mortgage history for past 2 years and name, address and phone number of all landlords for past 2 years (if applicable). 
  • Signed personal tax returns, corporate or partnership returns including year-to-date profit and loss statements, balance sheets, K-1 and 1099’s for the past 2 years.
  • All business bank statements for past 3 months.
  • Statements for bank, investment and/or retirement accounts (all pages) for past 2 months. You will be asked to explain all deposits that are not normal direct deposit payroll.
  • For VA Loans: DD-214 or copy of Statement of Service and current LES.
  • Verification of other income – child support, alimony, retirement or social security awards letter.
Additional documentation could include:
  • Your business license.
  • Proof of business insurance.
  • Signed statement from your Certified Personal Accountant.
  • Receipts for business purchases.
  • Independent contractor agreements.
Requirements can vary. Contact your lender directly for complete list of documents needed.

Tips and preparation

Help prepare yourself for buying a home with these helpful tips:
  • Understand your debt-to-income (DTI) – Your DTI shows how you manage your finances by comparing the amount of debt you have to your overall income. Many lenders will not lend to borrowers with a DTI greater than 43%. You can help lower your DTI by avoiding taking on new debt or paying off existing debt.
  • Get organized – You will be submitting more paperwork and proofs of income than someone who is not self-employed. It’s helpful to keep your business and personal expenses separate and begin organizing tax returns and bank statements. The more proof you can gather that supports your income, the better.
  • Identify your expenses – Business expenses impact your ability to buy a home because they decrease earnings reported on your tax returns. Try to limit these expenses a year or two leading up to buying a home. It’s also important to consider any future taxes you’ll have to pay.
  • Check your credit score – Your credit can affect how much money you can borrow and the interest rate you will pay. Under the Fair and Accurate Credit Transactions Act of 2003, you have the right to view your report from each of the three major credit reporting bureaus (Experian, TransUnion, Equifax) once a year. It’s free, typically takes less than 15 minutes and it won’t negatively affect your credit. To view your free reports, visit AnnualCreditReport.com.
  • Save, save, save – Consider saving for a larger down payment. It can help give you access to lower rates, make your offer more attractive and provide emergency funds in case you run into unexpected expenses or repairs.
  • Find an experienced team – Working with an agent and lender that is familiar with self-employed buyers can make for a smoother process and reduce stress.
  • Get pre-qualified first – Getting pre-qualified first will let you know how much home you can afford, help you set a budget, and eliminate time wasted during your home search.
  • Consider your home needs – As someone who is self-employed, how will that impact your home search? Determine what will be deal breakers and what things you can settle on, such as location or at-home office space.

 
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