Like many self-employed business owners, your hard work has finally paid off and you’re in a position to purchase a home. As a self-employed individual, you’re likely familiar with the difficulties of getting financing, even though you might earn a good living. However, these challenges are especially prevalent when you’re purchasing a home because of the stricter mortgage requirements implemented after the Great Recession.
And, unfortunately, in order to buy a house, you typically need a mortgage. This is the biggest challenge you will need to overcome throughout the process. So, how can you do that?
If you’re hoping to buy a home in the near future, there are several ways you can prepare to make getting a mortgage as a self-employed borrower much easier:
1. Keep All Your Financial Documentation
It can be easy to brush off certain payments and receipts from your clients as trash once the checks are cashed. However, you may be doing yourself a disservice. Lenders need to be able to verify that you can afford a mortgage and that you are a legitimate business.
Usually, mortgage lenders use W2s to confirm a borrower’s income. However, if you’re self-employed, you don’t have a steady paycheck or W2’s for them to refer to. As such, having documentation to act as proof of income is especially important.
If you aren’t formally registered, but instead operate as an independent contractor, it’s even more crucial that you keep track of every single payment you receive. That doesn’t necessarily mean you need to hold onto every piece of paper though. You can use the Genius Scan mobile app to turn the documents into digital files that you can then save in a folder for easy access when you need them.
2. Work with a Tax Professional This Year
Many self-employed workers handle their taxes on their own as a way to cut their business expenses, even by the smallest amount. After all, every dollar counts. However, as you well know, it can be very difficult to do your own taxes and admittedly there is room for error.
If you typically do your taxes using a software, you might benefit from having them done by a professional this year. This is because both you and the lender can have full confidence that the information regarding your income is correct.
3. Look into Other Mortgage Options
If you’ve been denied a traditional mortgage because you do not have the necessary documentation to prove your income, don’t lose hope just yet; you should consider a Non-QM (non-qualified mortgage) loan.
These types of loans use different methods and more flexible underwriting terms to qualify borrowers for loans and are often a better solution for those who are self-employed. Non-QM loans like Griffin Funding bank statement loans, which use your bank statements instead of W2’s, might be your best bet to secure a mortgage with the best possible terms.
4. Shop Around
Looking for a mortgage as a self-employed business owner can be rough. It’s not uncommon to be presented with high or downright unreasonable loan terms that can deter you from buying a house. However, with more and more individuals choosing to start their own small businesses and become their own boss, there are more loan options that cater to them. Unless you’ve been fortunate enough to receive especially favorable loan terms on the first try, you may want to shop around to ensure you’re getting the best possible mortgage rate.
5. Create a Budget & Stick to It
Now that you have the groundwork laid out for how you’ll prepare to get a mortgage and purchase a new home, you’ll need to plan financially. While running your own business can be somewhat unpredictable when it comes to expenses and income, you should forecast the next year and create a budget that will allow you to save for the largest down payment possible. Plus, you need to factor in the mortgage payment you’ll be responsible for once you purchase your home.
If you don’t already use one for tracking your business activities, you should install a budgeting app. Additionally, you may want to invest in a financial advisor or find a Chief Financial Officer (CFO). Not ready to take on such a large expense? You can hire a part-time CFO with PARO who will be on-demand to provide financial and strategic guidance.
Establishing a plan and following it is the key to making sure that you’re able to qualify for a mortgage and get the home of your dreams as soon as possible.