Gearing up to buy a house for the first time is an incredible financial and life-long achievement worth celebrating. Not only are you preparing to make one of the largest investments you’ll possibly ever make, but you’re also catching a shiny glimpse of what your future could look like for the next coming years or even decades.
If you run your own small business from home, or identify as a gig worker or an independent contractor, and want to purchase a house, you may quickly find that it’s more difficult for you to obtain financing than traditional full-time workers. The reason behind that is that it’s often harder to prove how much money you have as a self-employed worker without a steady paycheck or W-2. That’s precisely why most lenders have tighter guidelines for self-employed borrowers.
Don’t be discouraged— while you may face a few more obstacles in the process, it’s not an impossible dream to own a home. In addition to all of the fun tasks like touring homes and exploring neighborhoods, there are plenty of challenges prospective homebuyers must consider before they can call their dream home their own. In this post, we’ll walk you through how to buy a home when you’re self-employed and provide the insight you need to prepare for the process.
Step 1: Save for a Down Payment
Regardless of whether you’re self-employed or not, the more money you’re able to put down for that first down payment, the easier it’ll be to get approved for a mortgage. Not only will your monthly payments be lower, but you’ll end up spending less altogether over the lifespan of the loan.
However, as a self-employed worker, your investments take on an additional importance – they also stand as evidence of financial security. In the eyes of a lender, financing a self-employed borrower is often considered to be riskier, which is typically why more financial information is required before approval.
In the event that you have a sizable amount of savings to back your application, the lender will view you as far more reliable and may put you on a faster track toward approval.
Step 2: Determine Your Budget
Once you’ve got a clear picture of the sort of funding you’re able to qualify for and the down payment amount you can manage, you can shift your focus to working through how much of a home you can reasonably afford.
Start this process by comparing monthly mortgage repayments over time with your projected monthly income and other outgoing expenses to obtain a clear idea of what your working budgets will look like in the years to come. Doing this will also give you insight into how long you can expect to pay your mortgage before your home is completely paid for.
Step 3: Get Approved for a Mortgage
According to Gallup, approximately one-third of all workers in the United States identify as part-time or full-time freelancers or contract workers. Self-employment can be enticing for a variety of reasons, and with its growing popularity, we can only hope modern lenders start shifting their preconceived notions about reliability and regulations for lending. That said, a whopping one-third of American workers may find it difficult to get approved for a mortgage with their self-employed status.
Fortunately, there are a number of clever moves you can make to better your chances of getting approved for a self employed home loan, including:
- Lowering your debt load.
- Registering and licensing your business.
- Paying yourself a W-2 wage rather than an owner’s draw.
- Reducing your tax deductions.
- Keeping separate business and personal accounts.
- Maintaining good records.
Step 4: Pick the Right Mortgage
There are several varieties of home loans, and exploring all of your options will make it easier for you to make an intelligent choice. The most common mortgage loans available include:
- Conventional Loans
- FHA Loans
- USDA Loans
- VA Loans
Wrapping Up
Purchasing a house requires a multitude of intricate moving parts and complex actions. With just about any large investment, it’s worth taking your time with the process to ensure you move forward with a home and financial commitment decision you’re truly happy about. Using these steps, you will be able to walk into the next phase of your life with all the encouragement and trust you need, self-employed and all!