If you are self-employed, you probably know that you face more challenges when it comes to buying your own home.
Whether you’re an independent contractor, a consultant, or a freelancer, you face a bigger challenge than an employee working for a company. You have to present a more detailed application, face more scrutiny, and demonstrate more proof of financial stability.
In the coming years, however, we will see an increasing number of mortgage loan applications coming from self-employed professionals.
The Growing Freelance Economy
Today, over 30% of the workforce is self-employed, and that number keeps rising.
Just after the recession, the number of temporary employees in the United States rose by 29% and the country’s 200 largest companies claimed that over 1/5th of their workforce consisted of temporary workers.
Intuit, the software company behind Quickbooks and Turbotax, predicts that by 2020 that number will rise to 40%. According to Forbes, that number could be as high as 50%.
While being self-employed may have its perks, such as working from home and setting your own schedule, it also has its downsides; particularly when it comes to obtaining loans.
The larger the loan, the more difficult it is to obtain, making mortgage loans some of the most difficult of all. With the right income and the right preparation, self-employed professionals can get the loans they need to purchase their own homes.
Tips for Buying a Home If You Are Self-Employed
Ultimately, banks like to see consistency, stability, and growth. When applying for a loan, you need to provide detailed proof of your ability to repay that loan. There are a few things to keep in mind if you are self-employed and looking to purchase a home:
Declare everything on your taxes.
Tax returns are the most important documents that banks look at when you apply for a mortgage loan. Income that doesn’t get reported doesn’t exist, at least as far as the bank is concerned.
While some income may be easy to “slip under the radar,” this is not advisable. Doing so will only lower your income and your borrowing power.
Demonstrate consistency in income and employment history.
Banks like employees who work for other companies because they view these jobs as steady and stable. When you are self-employed, the next best step is to demonstrate that stability. On your application, list long-term clients, financially stable spouses, and any other assets that could help your position.
If you are borrowing money for the down payment, make sure that you include the source of these monies. If you are borrowing from a family member or friend, or accepting a monetary gift from a family member, the bank will require you to provide proof of the source. There is specific paperwork required for these instances.
Write off as little as possible to business expenses.
Borrowing power comes from your adjusted income, not your gross income. In other words, lenders look at your income after you have deducted any business expenses.
If you make $50,000 in one year and write off $15,000 to business expenses or investments, that amount will not count towards your borrowing power. While self-employment makes it easy to write off a large number of expenses, remember that this has a direct impact on your borrowing power.
For at least one or two years leading up to your loan application, it makes sense to write off much less than you normally would.
Provide exhaustive documentation.
Banks will be very thorough when examining your application. Keep detailed records and be prepared to provide those to the bank. Save everything you think will help you on your application, including receipts for expenses, invoices, 1099s, transaction records related to your assets and down payments, and tax returns. Go back at least two years, most banks will look back even farther, so be prepared to search out specific documents.
Pay off debts and save money.
This may sound like common sense, but it is even more important when you work for yourself.
Cash on hand and good credit are critical for showing that you will be able to make payments. The more money you can put down, the better it will be for demonstrating financial stability. This may lower your monthly payment and help you avoid mortgage insurance.
Avoid taking out new loans.
Unless you absolutely have to, it’s better to avoid purchasing a new car or taking out any other type of loan. As mentioned, business expenses factor heavily into the mix. During this time, it’s wise to avoid borrowing money for your business. Wait until after you have purchased your home before applying for smaller loans.
Although the numbers may work out the same, it’s often easier to obtain these smaller loans after you have already secured your mortgage loan.
Shop around at smaller banks and credit unions.
Local banks and credit unions are more likely to offer you loans at better rates.
After the recession, large banks are not as flexible with their loans. You will have to shop around and may get a better deal from smaller lenders.
What Does the Future Hold for Self-Employment and Loans?
The legal definition of “independent contractor” keeps evolving, so the rules and regulations governing this growing class of workers also keeps changing.
In the near future, don’t expect much to change when it comes to obtaining loans. If you are self-employed and want to buy a home, preparation is the key to success. As a borrower responsible for a large loan, it is critical that you show financial responsibility with a detailed application.
About the Dulcie Crawford Group
If you are a freelancer or self-employed professional and want to buy a home of your own, The Dulcie Crawford Group is here to guide you through the Loan Application Process.
A native Las Vegan, Dulcie Crawford has helped hundreds of homebuyers in the Vegas valley find their dream home. Whether you want tips on how to find a lender or advice about Las Vegas neighborhoods, Dulcie is here to assist.
For any questions on buying or selling a home, do not hesitate to call Dulcie at 702.505.2775 or email her at email@example.com. To see available properties or more of Dulcie’s community and industry blogs, please visit, newdulcie.agentreputation.net.