Self-Employed and Saving for a Down Payment
Saving for a down payment continues to be one of the most pervasive obstacles to homeownership today. Even with low down payment options available, down payment amounts are increasing as home prices appreciate due to limited available inventory and strong buyer demand.
According to the US Census, median income in 1995 approximated $33,000 and the average home cost about $155,000. In 2015, median income was about $56,000 and the average home cost around $350,000. This data shows home prices have increased 126%, but average income has only increased 70%. This disparity in appreciation is limiting would-be home buyers’ ability to save for a down payment and leading to a delay in homeownership across demographics.
Among the challenges potential buyers face are high student debt loads and sluggish income growth. To repay debt faster and compensate slowed wage growth, many young people are choosing to take on additional sources of income like freelance work or forgo traditional employment all together in favor of self-employment or contract work. A creditworthy, self-employed borrower can obtain mortgage financing, but will still be required to produce tax documents like any other home buyer. Self-employed borrowers make up approximately 14 million borrowers nationwide. Recently, Fannie Mae issued a new set of loan guidelines to make it easier for self-employed borrowers to obtain financing.
The underwriting process varies from lender to lender and loan to loan, but for self-employed borrowers especially, producing employment documentation can be a lengthy task. Fannie Mae’s reduction of paperwork impacts self-employed borrowers with business distributions that are irregular or non-existent, self-employed borrowers who don’t have two years of federal tax returns to support their business, and salaried borrowers with a second, self-employment job for which the income is not required to qualify.
A self-employed borrower typically has to self-report taxes and set aside taxes out of payment received from clients. Unfortunately, CNBC reports that nearly a fourth of all Americans participating in the “gig economy” are not correctly declaring their taxes. The report found 33 percent of millennials, 26 percent of Generation Xers and 17 percent of baby boomers are not being fully honest on tax reporting. Inconsistent or incorrect reporting now can be a costly mistake later, especially when that person tries to apply for mortgage financing.
Self-employed potential home buyers should consult a financial consultant prior to starting the home search. Most real estate professionals suggest starting credit repair six months to one year before starting the home search process.
Sources: Architectural Digest, CNBC, The Mortgage Reports