3 Things Self-Employed Borrowers Need to Know Before
Buying a Home
Buying a home is one of the most exciting milestones in your life, but there are a few things you’ll want to know before you make the leap toward homeownership. This is especially true for those who are self-employed borrowers since there are additional steps that are required. Despite that, having a great lender and real estate agent in your corner can make the process run smoothly and lead you on the path to homeownership in no time!
Why Does It Matter That I’m Self-Employed?
In recent years, more and more people – especially Millennials and Gen Z – have taken an entrepreneurial route to their careers. With immense flexibility, the ability to make the rules, and the pride that comes with building a business from scratch, it’s no surprise that self-employment has grown so much. And let’s not forget the newer trend of monetizing social media and becoming ‘influencers’ – there is big money on this career path, which affords these individuals the ability to make large investments, such as buying a new home.
While being self-employed is very rewarding, it can be a tricky landscape to navigate when it comes to borrowing money. Because self-employment income tends to vary each month, a bit more scrutiny goes into the mortgage application process. Unlike a W2 employee, who receives a steady paycheck each pay period, self-employed individuals may find that their income fluctuates by thousands of dollars each month. Your lender will need to identify an average qualifying income based on your income history, and he or she does this by reviewing at least two years’ worth of tax returns to see where your average monthly qualifying income falls.
What Do I Need to Know Before Obtaining a Mortgage?
If you’re a self-employed home buyer and plan to apply for a mortgage, it’s important to find a lender who has experience working with self-employed borrowers. There are quite a few intricacies involved, and you’ll want to have a top-notch professional in your corner. A knowledgeable lender will lay out exactly what is needed to begin the application process, so you’ll have a solid starting point before diving in too deeply. Here are a few pointers you should be aware of as you navigate home-buying as a self-employed borrower.
Documentation is Key
Applying for a mortgage requires a significant amount of paperwork for any type of borrower, but there are additional items needed when self-employed. Since you won’t have W2 paystubs to show your income, you’ll need to have at least two years of tax returns (including schedules), plus profit and loss statements. The biggest thing to consider for self-employed individuals is the fact that many write off as much as possible to lower their taxes. This means qualifying income is lower, which in turn, can impact your debt-to-income (DTI) ratio quite significantly and decrease the amount you can borrow. It’s a good idea to consult with a tax accountant if buying a home is in your future, as they can help you determine how much to write off and help you keep accurate records.
Credit is King
Not unlike other types of buyers, self-employed individuals should focus on building good credit before buying a home. Since you’ll have a few additional steps in the mortgage underwriting process, having excellent credit can be very beneficial when proving your creditworthiness for obtaining a mortgage. Try to pay down debts to lower your DTI before you begin the homebuying process, and of course, always make sure your payments are timely.
Plan for a Down Payment
There are many types of mortgages, all of which have separate down payment requirements. It’s important to know, though, that as a self-employed borrower, you may find some types of mortgages are harder to qualify for than others, and business funds aren’t always able to be used for qualifying. It’s a good idea to discuss your options with your lender to get an idea of how much cash you’ll need to have on hand at closing. This amount will vary depending on the price of the home you’re purchasing, as it is a percentage of the sale price.
While it may seem more challenging, navigating the mortgage process as a self-employed buyer isn’t impossible. With the right team helping you and taking the time to plan for this purchase, you will be well on your way to becoming a homeowner.
When you’re ready to begin your home buying journey, C&F Mortgage will be here for you every step of the way. Our team of experienced lenders will help you navigate the ins and outs of becoming a self-employed homeowner – get in touch with us today to get started!
The information contained herein (including but not limited to any description of C&F Mortgage Corporation and its lending programs and products, eligibility criteria, interest rates, fees and all other loan terms) is subject to change without notice. Restrictions apply. This is an advertisement and not a commitment to lend. C&F Mortgage Corporation NMLS# 147312 Equal Housing Lender.