There are a lot of perks to being self-employed. You get to make your own decisions, be your own boss, and determine your hours. However, if you are self-employed and trying to buy a home, you may come across some obstacles.
If you are self-employed, you will need to prove your income with tax returns rather than using a “stated-income” loan. Your loan will be based on your last two years of tax returns, which could consequently show reduced income for some self-employed people.
If your income increases between years one and two, the lender generally averages the two. If the second year’s income is lower, the lender will sometimes use the second year’s number.
People who are self-employed generally try to write off as many expenses as they can for tax purposes. However, this tax strategy could be detrimental when applying for a mortgage loan. Since mortgage eligibility is based on net income, all those business deductions could ultimately count against the borrower. If you foresee a home purchase in your future, you may want to consider what you include in your tax deductions.
In addition to proving income, borrowers have to prove their business exists. For some lenders, two years of income tax returns are sufficient. However, other options for verification may include a statement from an accountant, a business license, or copies of 1099 income statements.
If you run your own business, having a year’s worth of mortgage payments liquid and in reserve in a savings account can boost your prospects for a mortgage loan.
If you don’t have two years of solid tax records or don’t have enough in savings, but you still want to purchase a home and feel you are financially ready, you may want to consider a qualified co-signer to help you secure a loan. Make sure the prospective co-signer also has his or her own finances in order. Borrowers who have less than two years of records will need to have a strong co-applicant on the transaction. Usually, lenders look more favorably on someone who will also occupy the home with you.
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