More than 10 percent of the U.S. population identifies as self-employed, a freelancer or a solopreneur – and this isn’t even counting the gig economy. Many of these self-employed workers are entrepreneurs lauded for their tech and product innovations.
The downside: those who are self-employed can’t always count on a consistent cash flow. They may face periods with little or no work ─ or long delays getting paid. This is a fact of life that tends to make lenders nervous. Even though the self-employed might find the home-loan process tricky, being approved is not impossible.
Here are four home-loan tips for the self-employed:
1. Be mindful about how you fill out income taxes
If you’re self-employed, you might be taking advantage of your allowed deductions. But doing so could make your income appear less than what it really is. Mortgage lenders typically ask to see your income tax returns for the past two years. If you know you will be applying for a home loan two years down the road, consider writing off fewer expenses so your income will appear higher on your tax returns.
2. Get a co-signer
If you’re confident your income is good enough and steady enough to buy a home, but you don’t qualify for a big enough loan or for a loan at all, consider asking someone close to you to co-sign. This co-signer will be on the loan with you and makes this person responsible for the loan if you stop making payments. Your co-signer, however, will not be on the title and doesn’t need to live in the house with you.
3. Keep your business and personal accounts separate
When you mingle your personal and business income and expenses, you make it tough for lenders to assess the strength of your company; they can’t tell where your finances end and your business begins. Plus, if you use your personal credit for business expenses, your credit score will probably suffer since 30 percent of your credit score comes from amounts owed. You can solve this puzzle of keeping your personal and business accounts separate by opening a business bank account and getting a business credit card.
4. Be prepared to pay a higher interest rate
You’ll likely pay a higher interest rate if you’re self-employed – but probably not much more. Figure that with each one-percent increase in interest rate, you’ll pay about $58 more each month per $100,000. And once you have a solid payment history, you might be able to refinance down the road to get a lower interest rate.
Taking these extra steps can help you if you’re a self-employed worker who wants to qualify for a mortgage. This assumes you’re meeting all the normal home loan requirements – namely, having a good credit score, a low debt-to-income ratio, at least two months’ worth of mortgage payments saved, and a decent down payment.
Published May 8, 2017
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