How to Buy a Home When You’re Self-Employed

Blog posted On July 12, 2018

Buying a home when you are self-employed or own your own business will require more documentation than if you are a salaried employee with a yearly W2.  In today’s increasingly mobile job market, more and more US workers are choosing self-employment over traditional payroll jobs.  Freelancing is growing in popularity as workplaces become more remote.  Buying a home when you’re self-employed or own your own business is possible, when you do your homework.  Freelancers and small business owners can follow these tips for a smooth home buying process.

Save Your Tax Returns

Lenders look at W2 forms to confirm that the loan applicant has a regular source of income and intakes consistent wages.  When you are self-employed, you may not have W2s regularly available, using tax returns as your proof of income will show more consistency.  Most lenders will ask for at least two years of tax returns, but the more you can provide the better.

Build Your Credit

Lenders use the credit score to evaluate the risk of the loan applicant.  The credit score is comprised of your payment history, amounts owed, length of credit history, credit mix, and new credit.  Seemingly small missteps like missed or late payments can dock your credit score in as quickly as 90 days.  You should also avoid taking out additional lines of credit or making other high dollar purchases during or after your mortgage application.  Check your credit statement regularly for inaccuracies and report any mistakes to Credit Bureaus immediately.  Most financial planners recommend starting to repair credit at least six months to a year before you start the mortgage application process. 

Reduce Debt-to-Income Ratio

Many small business owners strive to minimize their taxable income by writing off work-related expenses.  This lowers the taxable income, but a lower income may raise the debt-to-income (DTI) ratio.  Most lenders are looking for a DTI of 43% or less.  One way to improve your DTI, without losing tax write-offs, is to pay down long-term debt before seeking mortgage financing.  For example, if you are close to paying off a car loan, consider postponing your home search until the loan is closed.  Again, avoid taking out additional lines of credit, since this will raise the DTI. 

Choose the Right Lender

Never underestimate the value of relationships.  Choosing a loan officer who has worked with self-employed borrowers before is a big plus.  The right loan officer will be able to answer your questions and guide you through the process with ease. 

Buying a home when you are self-employed is possible.  More and more workers are choosing freelance or owning their own business, and the right mortgage lender can help you find the right loan for your employment and income.   

Sources: Apartment Therapy, US News