December 21, 2020
Tips for Buying a Home If You’re Self-employed
Being self-employed affords you a lot of independence. You have flexibility with your work hours and can set your own wages. However, buying a home can be a bit of a challenge in this situation. Use these tips in order to successfully purchase a home when you are self-employed.
Register and License Your Business
Register and license your business a few months before you start looking for a home. If possible, issue yourself a W-2 and have your business pay your wages. Keep your business accounts separate from your personal accounts. For example, do not take on personal debt in order to buy equipment for your business. Maintain accurate records of your business, including all income and expenses.
Locate Your Bank Statements
You will need your bank deposit and withdrawal statements as a self-employed person who wants to apply for a mortgage loan. If you have only a fair credit score, you may need several years’ worth of bank statements. When you have good credit, plan to provide two years of bank statements. If your credit is excellent and you have a 20% down payment for the purchase of a home, one year of bank statements may suffice.
Compile Your Tax Returns
The bank will also ask for your income tax returns. It is a good idea to have three to seven years’ worth of federal income tax returns to show to the mortgage lender. Your tax returns demonstrate your income and whether or not it is consistent from year to year. As a self-employed person, this is important for proving that you can afford the mortgage principal and interest payments, property taxes, homeowner’s insurance, and maintenance expenses of owning a home.
Consider Ways to Increase Your Income
You may want to try increasing your income for a year or so before applying for a mortgage loan. Some ways to increase your income while self-employed include accepting additional work, raising your rate, or offering additional services your customers want. You could also sell items you no longer need. This would help you save for a conventional 20% down payment. The ability to make a large down payment will help you avoid paying points or additional interest to the bank. You will also have lower monthly payments if you put a larger amount down on the purchase of a home. This will improve your monthly cash flow.
Lower Your Expenses
If you can lower your living expenses, you’ll be able to save more for a down payment and have some money left over for furnishing your home, buying lawn care equipment or handling any repair or replacement issues that surface after you move into the home. Some ways to lower your living expenses include eliminating subscription services, downgrading your data plan, avoiding shopping for anything other than food and essentials, bartering for what you need or exchanging your professional services for other services or items you need.