How to Make Home Buying Easier When You’re Self-Employed

Being self-employed can make getting a mortgage more complicated. This isn’t meant to discourage you, though. The truth is, many self-employed people purchase homes every year. But since your income isn’t as straightforward as a salaried worker, mortgage lenders will look at your finances more closely.

You might have a few more hurdles to overcome, but in the end, the extra work is worth the effort.

Here’s a look at five tips to make buying a home easier when you’re self-employed.

1. Continue to grow your business

One reason it’s more difficult to get a mortgage as a self-employed borrower is because your earnings are likely to fluctuate from month-to-month. And as a result, your income may see significant increases or decreases on a yearly basis.

If you’re self-employed and thinking about a home purchase, home buying is easier when there’s business growth. You want your income to increase each year, or at the very least, remain the same.

When you apply for a mortgage, you’re required to provide complete copies of your tax returns from the past two years. Information on your return is how our underwriters gauge whether your income is consistent.

Income that decreases from one year to the next will raise a red flag and make it harder to get a mortgage. Typically, lenders will average your income over two years to determine your qualifying amount. But if there’s a big decline in your income from year one to year two, they might use the lowest of the two incomes for qualifying purposes.

2. Reduce your tax deductions

Tax deductions can be a godsend when you’re self-employed. These business expenses reduce your total business income, allowing you to pay less in income tax. But what helps you save on taxes doesn’t help when applying for a mortgage. And unfortunately, too many tax deductions may reduce your net income by too much, reducing your qualifying income amount.

As a general rule of thumb, the more income you show on paper, the easier it’ll be to get a mortgage when self-employed. So if you’re thinking about buying a home, limit your business tax deductions for at least the next two years.

3. Improve your credit score

Maintaining a high credit score makes it easier to purchase a home when you’re self-employed, and it puts you in a better position to get a favorable rate. Therefore, aim for a score of 740 or higher. Excellent credit is proof of responsible credit habits, and it helps lenders to feel confident in your ability to repay your loan. If you’re looking to maximize your credit score, pay your bills on time, pay off debt, don’t cosign loans, don’t apply for new credit unnecessarily, and check your credit report at least once a year for errors.

4. Save a bigger down payment

If you have too many business deductions, thus lowering your qualifying income amount, consider a bigger down payment.

Most mortgage programs require between 3% and 5% down. But if you’re able to save more—say 10% to 20%—you’re able to finance a lesser amount. Plus, a down payment of at least 20% can help you secure a lower interest rate and alleviates mortgage insurance, which also results in a lower monthly payment.

5. Maintain good financial records

Along with tax returns, employees have to show their most recent W-2s and their most recent paycheck stubs. Because you don’t have paychecks stubs, you’ll likely need to provide a year-to-date Profit and Loss statement for your business, so it’s important to maintain good financial records before applying for a loan.

Final Word

Our team of loan experts has experience working with self-employed borrowers, and we can help you find a mortgage that’s right for your situation. Give us a call or fill out the contact form today to get started.