There’s no time clock, no dress code and no boss breathing down your back. For many people, self-employment is certainly the American dream. After all, the perks of working for yourself are legion. Self-employment offers unmatched control – and not just of your business.
When you work for yourself, you also control your time – the stuff, as they say, that life is made of. But when it’s time to purchase a home, self-employment could make you feel anything but in control. In fact, securing a mortgage as a business owner or independent contractor could be harder than you think.
But with more than 10 percent of U.S. workers self-employed in 2015 (according to the U.S. Bureau of Labor Statistics), rest assured the other American dream is possible too. Here’s what you need to know about getting a mortgage when you’re your own boss.
Prepare for a data dump
Despite what you see in old movies, getting a loan today requires a lot more than a friendly relationship with your neighborhood banker. Getting a mortgage under any circumstances requires a healthy load of paperwork – from pay stubs to tax documents to banking statements.
When you’re self-employed, you can count on a healthy load of paperwork times two, because you’ll need records for your personal finances as well as your business. Additionally, your lender will likely require a longer financial history. That’s because the lender’s primary concern is your ability to repay the mortgage. If your income is not consistent (as it is more likely to be as a W2 employee), your lender will want to see how your finances track over time.
Furthermore, when your income fluctuates year after year, it can be more difficult for lenders to assess the size of mortgage for which you qualify. The single best thing you can do for yourself when you’re looking to buy a home is to gather as many financial records as possible. The more transparent you can make your financial situation, the better.
Give yourself some good credit
While paperwork requirements might differ for self-employed mortgage applicants, one age-old lending rule remains the same: the better your credit, the better your odds for securing a mortgage.
You already know a lender is going to check your credit. What you may not realize is that it may look at your business credit rating as well. This is particularly true if you’ve had a habit of mixing business and personal expenses – for example, charging a company expense on your personal credit card (or vice-versa).
A good rule of thumb (and not just for the sake of your mortgage application) is to keep your business finances separate from your personal finances. That means using a company credit card rather than a personal credit card when making business purchases and holding business cash and personal cash in separate accounts.
If you’ve personally signed for a business loan, keep in mind this will likely negatively impact your debt-to-income ratio, a significant piece of information lenders glean from your credit report.
Deduct with caution
It’s one of the major perks of self-employment: you can write off verified business expenses. But the same tool that gives you a boost at tax time could come back to bite you when you’re applying for a mortgage. That’s because, to a lender, your income isn’t the load of money you’re bringing in; it’s the amount you reported to Uncle Sam – after you’ve made all your deductions.
This can be a difficult balance to strike because you depend on those deductions to keep your business prosperous. At the same time, lowering your taxable income also negatively impacts your debt-to-income ratio, explains an article in usnews.com. If you’re considering purchasing a home in the near future, keep your bottom line in mind as you tackle your tax deductions.
Choose the right product
Navigating the mortgage world when you work for yourself can be intimidating. Fortunately, many lenders offer products specifically tailored to self-employed homebuyers. For example, Veritas Funding offers Self-Employed Solutions (SES) loans that can qualify you based on your gross deposits, without requiring your tax returns.
For more information, or to apply, visit Veritas Funding, or call (801) 639-0900.