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How to Purchase a Home When You're Self Employed
Whether it’s a home-based business, an eCommerce operation, or a brick-and-mortar location, many of us have made the dream of being self-employed a reality. However, along with self-employment comes unique challenges that influence business growth as well as personal development.
In terms of personal development, many self-employed individuals want to take their living quarters to the next level by purchasing a home. Being self-employed however, can cause an already confusing and complex process to become more challenging.
Let’s take a look at five important factors self-employed people should consider when preparing to purchase a home.
Understanding the Documentation You Need
One challenge self-employed individuals face when purchasing a home is understanding the documentation needed to improve their chances of getting approved for a home loan. Many small business owners don’t take the time to learn what documents to provide in the home buying process. If you do, the process can be much less stressful.
Among the documents required by most lenders is a least the most recent two years of your personal tax returns. If your business operates as a sole proprietor, the lender will pay special attention to the schedule C form on your return. The schedule C is where the income and expenses for your business are reported. If your business operates as a partnership or a corporation your lender will also require at least 2 years worth of profit and loss statements, a current balance sheet, bank statements, and proof that your business is operational and in good standing. You also want to keep records on any other sources of income, debts, assets, as well as other relevant financial information you think might be important.
It is important to understand the ins and outs of these documents and why they’re needed in the home buying process. In addition, be sure that you are comfortable knowing how to present these documents in a polished, professional way. Finally, keeping those documents organized throughout the life of your business will be important for any future borrowing needs as well as to generally track the performance of your business. An inability to maintain good records in your business will negatively impact your ability to adequately prepare the documentation needed to fully process and hopefully approve your home loan application.
Maintaining Business Stability
As previously stated, most lenders want to see your business has a track record of profitability for several years. Lenders feel a lot better when you can prove your earnings and provide a paper trail that backs them up. While many lenders want to see at least two years of profitable operations, it helps even more if your documentation offers evidence that your business has sustained consistent profitability year after year.
So, be patient with yourself and allow your self-employment journey to unfold naturally. Don’t be afraid to enlist the help of a mortgage professional early on in your home-buying journey. They can help you put together a plan to ensure you’re ready to purchase a home when the time comes.
Saving for a Down Payment
When you’re self-employed, there are many reasons to save money related to business. This can include hiring new employees, upgrading equipment, attending events, and opening a new location. Given this fact, adding a personal savings goal to accumulate funds for a home loan down payment can be challenging. Fortunately, as long as you develop a solid savings strategy and stick with it you can eventually achieve your home purchase goal. The first step in saving for a down payment is establishing a budget for how much you want to spend on a home. Do some extensive research on what you absolutely need in a home and what you can live without. For example, how many bedrooms and bathrooms, the home square footage, the quality of the finish out and the location among others etc.
Then, find homes that mirror what you want and make note of their listing prices. Average these prices out and calculate 20% of that amount. This calculation gives you a rough estimate on how much you should save for a down payment on a conventional loan. By putting at least 20% down, you will usually be able to avoid having to pay private mortgage insurance which will increase your monthly payment. If saving for a 20% down payment is too challenging given the current cash flow of your business, you may be able to qualify for other loan programs which would only require you to put down 3%-5%. Discuss the options with your lender.
As you save for a down payment, it may inspire you to look at what you’re charging clients. Changing your pricing model or reasonably increasing your billing rates and/or product costs could help improve your cash flow and help you save more in a shorter amount of time.
An Excellent Credit Score
If you haven’t been consistent about managing your personal and business finances, there is a reasonable chance your credit rating may have been impacted. Many self-employed individuals struggle with maintaining a solid credit score due to the ebb and flow of revenue and expenses. Nonetheless, a good credit score is important and lenders will consider it when determine whether of not to make the loan as well as what interest rate they are willing to charge. A lower credit score usually means a higher interest rate. So, you must put in the effort to either maintain a good credit score or improve a poor one.
Reducing Debt
In addition to a good credit score, reducing your debt load will improve your odds of being approved for a home loan. First, do an audit of your finances and identify all the debt you need to pay off. Then, prioritize it based on which debts have the highest interest rates and pay those off first. Next, consider how you’re going to pay off each debt and create a payment plan. Be realistic. There is no reason creating a plan if you have no hopes of sticking with it. Finally, and most importantly, stick with the plan.
Conclusion
Purchasing a home can be a reality for all self-employed individuals who wish to do so. Being proactive and taking the steps mentioned above can put you well on the way to becoming a homeowner.
Meet The Author:
Luke Smith is a writer and researcher turned blogger.
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