Buying a home when you're self-employed is notoriously tricky. After all, an up-and-down income cycle is—understandably—less appealing to mortgage companies than a dependable paycheck. That said, it's far from impossible. Freelancers and small business owners alike can absolutely be approved to buy the home of their dreams. It just takes a little extra prep work.
If you're thinking about entering the real estate market while still being your own boss, listen up. Below is a list of three things every self-employed, aspiring homebuyer should be doing to transform themselves into a model buyer. Follow these tips and you'll be ready to get approved in no time flat.
Have at least two years of high-net tax returns
Since banks won't have a W-2 at their disposal to confirm your take home pay, they'll want to see your tax returns as proof. As a standard, they'll ask for two years of tax returns to confirm that your net income remains relatively consistent over time. Though, if you can provide more, that's all the better.
Jesse Gonzalez, a mortgage broker with North Bay Capital in Santa Rosa, Calif, suggested that some self-employed individuals even take fewer write-offs once they decide to start down the path to homeownership. While a lesser tax break is inconvenient in the short-term, doing so will add to your net income, which may help you qualify at a higher dollar amount once you're ready to start house hunting.
Boost your savings and credit score
Every prospective homeowner should pay attention to their credit score, but it's even more important for those of us who are self-employed. Banks will see this track record as an indicator of how likely you are to pay back your loan, especially when times are tough. So, make your payments on time, every month, and stay far above the minimum payment. You should also work towards paying down your debts as much as possible.
In addition to your credit score, focus on putting some money into savings for your down payment. Typically, 20% of your purchase price is considered ideal, but having the ability to put down more will make you seem like a safer investment.
Develop a relationship with a local lender
Yes, big financial institutions may be able to save you half an interest point or two on your loan, but when you're self-employed it's really in your best interest to seek out a local lender. According to Christopher J. Mayer, the Milstein professor of real estate at the Columbia Business School, local companies are often more hands-on than their competitors and are able to be a bit more flexible, which can make all the difference when your finances don't fit a cookie-cutter mold.
But, don't wait until you're ready to ask for a pre-approval to form this relationship. Start now. Holding other accounts at the bank will not only allow you both to build trust, but it can also open up more options for you in the future. For example, choosing a portfolio loan — where two or more loans are packaged together — can help you qualify for a mortgage at a better rate.