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How To Buy A House When You're Self-Employed
When applying for a mortgage, most people must provide paystubs and W-2 forms to verify their income. So what are you supposed to do if you're self-employed or a 1099 contractor? Many falsely believe buying a home is significantly more challenging if you're not a W-2 employee, but this is essentially a myth.
Buying a home when you're self-employed isn't difficult, it just requires a couple of extra steps. Our real estate agents are here to walk our non-traditional earners through the steps of securing a mortgage.
- Start By Gathering The Appropriate Documentation
Regardless of whether you're a W-2 employee or self-employed, you need to prove that you're capable of making monthly mortgage payments before you can close one of these Suffolk County homes for sale. This is accomplished by providing your lender with the correct documentation. Requirements vary by lender, but the documentation will likely include:- Personal tax returns
- W-2s (if you receive a paycheck through your company)
- Profit and loss statements / Schedule C / Form 1120S
- Personal and business bank statements
This list is by no means exhaustive — additional documents may be required depending on your lender, industry, and business type.
- Your Lender Will Still Need To Verify Your Employment
If you generate income through your own business, you still must prove your employment. This can be done through letters from current clients, a statement from your Certified Public Accountant, your state business license, evidence of insurance, or a combination of these things. - Consistent Income Is Key
The tricky thing for self-employed applicants is even if you're producing an adequate monthly income now, your past earnings can influence your chance of approval. You'll need to prove to your lender you've had a consistent and steady flow of income for at least two years. Most lenders require that your business has been active for at least 12 months. - Don't Merge Your Personal And Business Expenses
Make sure you avoid using your personal credit cards and bank accounts to fund business expenses. Major purchases can drive up your credit card utilization and unfavorably skew your debt-to-income ratio. Make sure your company is set up with its own bank account and credit card(s) so you can accurately represent your personal financial situation on your mortgage application. - Maintain Your Credit
Consistent income and your debt-to-income ratio are only a part of the equation. You also have to maintain a decent credit score. The better your credit score, the more likely you'll be approved, and the lower your interest rate will be. Make sure to make on-time payments on all existing trade lines, keep your credit card utilization rate low, and avoid taking out any loans or lines of credit in the months leading up to your home purchase.
While your personal credit will be your lender's primary focus, they may look at your business credit score too, so it's important to maintain your company's credit health as well.
Most lenders usually use the same criteria when evaluating company-employed and self-employed applicants, but those who run their own businesses should be prepared to produce more documentation. Contact us today for more tips on how to buy your first home.