While self-employment can give you more freedom and great satisfaction, it can also add some real challenges when trying to buy a home.
Self-employed will approach 33 percent of the workforce in the coming years.
There is something life-affirming about a ten-second commute. Walking from your master bedroom to your home office every morning, you don’t have to deal with traffic, standing in line at Starbucks for that cup ‘o joe, or dressing for success. If you have a separate storefront or office, you can arrive and work with pride knowing you have created your own work environment. But there are drawbacks to being self-employed, especially when it comes to qualifying for a mortgage. Why? Because lenders have a tougher time assessing your income.
Self-employed individuals who plan to buy a home are wise to strategize several years in advance. If you understand how lenders consider mortgage applications and self-employment income, you can take steps to make yourself more appealing. Let’s look at some general guidelines for making you look attractive to that entity who would make it possible for you to become a homeowner.
Lenders are all about the risk they will be taking on when they look at your mortgage application. They want to make sure they'll be able to get back the money they lend you, so it's important that you show enough income to cover the mortgage payments easily. This isn't that hard when you have a regular job to go to and steady paycheck showing a pattern of healthy income. For a self-employed individual, however, income can fluctuate. One month may find you in the pink, making more investments in your business, and the next might see you struggling to pay your bills.
It’s also important to know that lenders consider your income after deductions, which means you must be extra careful with write-offs, such as phone and internet services, office supplies, business trips, etc. While taking those deductions may help to lower your taxes, it also lowers your usable income in the eyes of mortgage lenders which, in turn, raises your debt-to-income ratio. That ratio is a measure of how much money you have coming in and going out each month.
And don’t forget about that pesky credit score. It’s a measure of how responsible you've been with borrowed money in the past, and it’s of great importance to lenders. It's vital to keep your credit score as high as possible if you want to give yourself the best chance of getting approved.