Increasingly, the workforce is moving away from the traditional 9-to-5 jobs and toward self-employment. However, simultaneously, in the world of real estate, the mortgage market is becoming increasingly more suspicious of those who wish to buy a home without a stable, predictable paycheck. Self-employed borrowers once relied heavily on what was referred to as a stated income. However, lenders now are increasingly expecting home buyers to prove that they can afford their homes.
Taxes Get in the Way
One of the challenges that self-employed individuals face is the fact that they do not appear to make as much money on paper as they do in reality. While those who are self-employed tend to make more money overall, they also tend to write off business expenses in order to save on taxes. Because they write off business expenses, self-employed workers appear to have a lower net income.
Another issue is the fact that your employed earnings will not count toward your total earnings for the year if you have transitioned from full-time employment to self-employment. If you have submitted a 1099, the loan officer will not be interested in what you reported on your W-2 as well.
Self-employed workers will need to plan for longer before they can begin the process of seeking a loan. This is especially the case with one-time write-offs.
Some Lenders Are Understanding
You will need to find a lender who is understanding of your situation. Some lenders allow for the self-employed to add back some of their deductions as a way to bolster their incomes. You will want to write off fewer expenses two years before seeking a loan, even if this leads to you paying more in taxes at the end of the year. Also, make sure that your personal finances are not mixed in with your personal finances. For example, always pay for business expenses using a business credit card.
There Are Ways to Improve Your Chances
One solution is to always save up more money to put down. The larger the down payment, the more options that will be available to you.
Hold off on taking out any loans until after you have gotten your mortgage. For example, if you are thinking of selling your car and getting a loan for a new one, it may be better to drive the old car for an extra year until you have the mortgage. Otherwise, you'll worsen your debt-to-income ratio. Also, if you have a car that you are on the verge of paying off, you may want to wait until you have made the last payment before seeking a mortgage.Share