How to Get a Home Loan When Self-Employed
When you’re self-employed, you’re used to having to plan ahead to accomplish your objectives. Having to work a little bit harder than everyone else to get where you’re going isn’t unusual either. As a result, the tips that you’ll discover while exploring how to get a home loan when self-employed aren’t going to surprise you.
How Lenders Define Self-Employment
Lenders tend to view self-employed borrowers as a higher risk than those who are traditionally employed. That means you need to be ready to make your case if you own your own business and you hope to secure a home loan. However, it’s not just people who own their own business that need to be prepared. According to The Mortgage Reports, lenders may consider you self-employed if the following is true:
- You are a freelancer or contractor.
- You have 1099 tax forms.
- You don’t have W-2 tax forms.
- You earn at least 25 percent of your income via self-employment.
- You own 25 percent or more of a business.
- You get the majority of your income from interest and dividends.
Why Getting a Home Loan Is Challenging When You’re Self-Employed
As Investopedia explains, self-employed borrowers often face some specific stumbling blocks when they’re seeking a home loan:
- Verifiable income: Lenders appreciate the easy way that they can document the income of borrowers who have a traditional employer. These individuals often simply need to hand over their W-2s. The process is trickier when you’re self-employed.
- Consistent income: Many self-employed people have incomes that ebb and flow. That can present challenges when you’re trying to convince a lender that you’ll be able to make a loan payment.
- Taxable income: If you’re self-employed, you probably use tax deductions to minimize your tax liability. That can come back to haunt you when you try to get a home loan because lenders use taxable income to determine how much a self-employed person can afford to borrow.
How to Plan for a Home Loan When You’re Self-Employed
Being self-employed certainly doesn’t mean that you can’t qualify for a home loan. If you know that you want to buy, you can set the stage for success with these tips from U.S. News & World Report:
- Build a solid track record of self-employment. Do your best to maintain a consistent work history. Try to time your purchase after two or three years of consistently strong or growing earnings.
- Maintain excellent records. Keep your business and personal funds separate, and keep excellent records so that lenders can see proof of your business income. If you know that you’re going to be purchasing a house, think carefully about which tax deductions you take. Having your records in order will make it easy to assemble the necessary documentation when you’re ready to try for a home loan.
- Polish your credit. A strong credit score is a persuasive argument. Check your credit reports for errors, and make sure that your credit score is as high as possible before your buy.
- Boost your savings. Healthy cash reserves reassure lenders that you have the means to make your loan payments even if your business slows. In a similar manner, building your savings can prepare you to make a sizeable down payment.
- Pay down debt. Paying down debt boosts your credit score and lowers your debt-to-income ratio. Both of these benefits can help you as you seek a home loan.
Are you self-employed and ready to buy? Count on the team at PrimeLending Dallas to help you find the right home loan product for your needs. Contact us today to discuss the possibilities.