CAN YOU BUY A HOME WHEN YOU’RE SELF-EMPLOYED?
BUYING A HOME IS A HUGE MILESTONE, BUT FOR SELF-EMPLOYED INDIVIDUALS, THE PATH TO HOMEOWNERSHIP CAN FEEL MORE LIKE A MAZE. WHILE THE FREEDOM OF SELF-EMPLOYMENT OFFERS MANY PERKS, IT ALSO PRESENTS UNIQUE CHALLENGES WHEN IT COMES TO SECURING A MORTGAGE. BUT IT’S NOT IMPOSSIBLE – YOU JUST NEED THE RIGHT TEAM IN YOUR CORNER. I’M HERE TO SHOW YOU THAT WITH THE RIGHT STRATEGIES SELF-EMPLOYED BUYERS CAN TURN THESE CHALLENGES INTO OPPORTUNITIES!
HOW TO BUY A HOME WHEN YOU’RE SELF-EMPLOYED
COMMON CHALLENGES
INCOME VERIFICATION: UNLIKE TRADITIONAL EMPLOYEES WHO CAN EASILY PROVIDE W-2 FORMS AND PAY STUBS, SELF-EMPLOYED INDIVIDUALS MUST PROVE THEIR INCOME THROUGH TAX RETURNS, PROFIT AND LOSS STATEMENTS, AND SOMETIMES EVEN BANK STATEMENTS. LENDERS LOOK FOR CONSISTENCY AND STABILITY IN INCOME, WHICH CAN BE TRICKY IF YOUR INCOME FLUCTUATES.
DEBT-TO-INCOME RATIO (DTI): LENDERS USE DTI TO ASSESS YOUR ABILITY TO MANAGE MONTHLY PAYMENTS. SELF-EMPLOYED INDIVIDUALS OFTEN HAVE A MORE COMPLEX FINANCIAL PICTURE, WHICH CAN MAKE IT HARDER TO MEET THE STANDARD DTI REQUIREMENTS. EXPENSES RELATED TO THE BUSINESS MIGHT INFLATE THIS RATIO, MAKING IT APPEAR THAT YOU HAVE MORE DEBT THAN YOU DO.
TAX DEDUCTIONS: WHILE TAX DEDUCTIONS CAN LOWER YOUR TAXABLE INCOME (AND THUS YOUR TAX BILL), THEY CAN ALSO REDUCE THE INCOME THAT LENDERS SEE, POTENTIALLY AFFECTING YOUR ABILITY TO QUALIFY FOR A MORTGAGE. THIS IS A DOUBLE-EDGED SWORD—WHILE IT’S BENEFICIAL AT TAX TIME, IT CAN COMPLICATE MORTGAGE APPROVAL.
LEVERAGING SELF-EMPLOYED STATUS
DESPITE THESE CHALLENGES, BEING SELF-EMPLOYED COMES WITH UNIQUE ADVANTAGES THAT CAN BE LEVERAGED TO SECURE A MORTGAGE.
DIVERSE INCOME STREAMS: SELF-EMPLOYED INDIVIDUALS OFTEN HAVE MULTIPLE INCOME STREAMS. THIS CAN WORK IN YOUR FAVOR WHEN APPLYING FOR A MORTGAGE. IF ONE INCOME SOURCE IS LESS STABLE, OTHERS MIGHT COMPENSATE, PROVIDING LENDERS WITH THE REASSURANCE THEY NEED.
BUSINESS WRITE-OFFS AND TAX DEDUCTIONS: WHILE THESE CAN REDUCE YOUR TAXABLE INCOME, THEY CAN ALSO BE STRATEGICALLY MANAGED TO SHOW MORE INCOME WHEN NEEDED. FOR EXAMPLE, YOU MIGHT MINIMIZE DEDUCTIONS IN THE YEARS LEADING UP TO YOUR HOME PURCHASE TO INCREASE YOUR REPORTED INCOME.
TYPES OF LOANS:
BANK STATEMENT LOANS: THESE LOANS ALLOW YOU TO QUALIFY BASED ON BANK STATEMENTS RATHER THAN TAX RETURNS. LENDERS LOOK AT DEPOSITS OVER A 12-24 MONTH PERIOD TO ASSESS YOUR INCOME.
STATED INCOME LOANS: ALTHOUGH MORE RARE, SOME LENDERS STILL OFFER STATED INCOME LOANS WHERE YOUR INCOME IS STATED ON THE APPLICATION BUT NOT VERIFIED WITH TRADITIONAL DOCUMENTATION. THESE OFTEN COME WITH HIGHER INTEREST RATES OR LARGER DOWN PAYMENT REQUIREMENTS.
NON-QM LOANS: NON-QUALIFIED MORTGAGE LOANS ARE DESIGNED FOR BORROWERS WHO DON’T MEET TRADITIONAL LENDING STANDARDS, LIKE SELF-EMPLOYED INDIVIDUALS. THEY OFTEN HAVE MORE FLEXIBLE REQUIREMENTS REGARDING INCOME VERIFICATION.
STRATEGIES FOR SELF-EMPLOYED HOMEBUYERS
KEEP DETAILED RECORDS: LENDERS WILL SCRUTINIZE YOUR FINANCIAL DOCUMENTS MORE CLOSELY WHEN YOU’RE SELF-EMPLOYED. KEEP METICULOUS RECORDS OF ALL INCOME AND EXPENSES, AND BE PREPARED TO PROVIDE ADDITIONAL DOCUMENTATION IF REQUESTED.
PLAN AHEAD: IF YOU’RE THINKING OF BUYING A HOME, START PLANNING AT LEAST TWO YEARS IN ADVANCE. ENSURE THAT YOUR FINANCIAL RECORDS ARE IN ORDER, MINIMIZE BUSINESS DEDUCTIONS FOR A COUPLE OF YEARS IF POSSIBLE, AND AIM FOR A STABLE OR INCREASING INCOME TREND ON YOUR TAX RETURNS.
WORK WITH A MORTGAGE BROKER: A BROKER WHO SPECIALIZES IN WORKING WITH SELF-EMPLOYED CLIENTS CAN BE INVALUABLE. THEY CAN HELP YOU NAVIGATE THE COMPLEXITIES AND CONNECT YOU WITH LENDERS WHO ARE MORE FLEXIBLE WITH INCOME VERIFICATION. IF YOU NEED A REFERRAL FOR A BROKER WHO SPECIALIZES IN SELF-EMPLOYED LENDING, I CAN CONNECT YOU WITH SOMEONE.
BUILD A STRONG CREDIT PROFILE: A GOOD CREDIT SCORE CAN HELP OFFSET THE CHALLENGES OF BEING SELF-EMPLOYED. PAY DOWN DEBTS, MAKE PAYMENTS ON TIME, AND AVOID OPENING NEW CREDIT LINES BEFORE APPLYING FOR A MORTGAGE.
IF YOU’RE SELF EMPLOYED AND LOOKING FOR HELP STRATEGIZING – WHETHER IT’S YOUR FIRST HOME OR AN INVESTMENT PROPERTY, I’M HERE TO HELP! REACH OUT WITH ANY QUESTIONS AND WE CAN SET UP A TIME TO CHAT.
ERIN PERRY | SAN DIEGO REAL ESTATE
COMPASS SAN DIEGO | KAPPEL REALTY GROUP
DRE# 02190074
