There is something life-affirming about a
ten-second commute. Walking from your master bedroom to your home office every
morning, you don’t have to deal with traffic, standing in line at Starbucks for
that cup ‘o joe, or dressing for success. If you have a separate storefront or
office, you can arrive and work with pride knowing you have created your own
work environment. But there are drawbacks to being self-employed, especially
when it comes to qualifying for a mortgage. Why? Because lenders have a tougher
time assessing your income.
In a 2018 New York Post article,
writer Gregory Bresiger quotes FreshBooks’ second annual
Self-Employment Report. “Those nontraditional workers — who will approach 33
percent of the workforce in coming years — want more control over how and why
they work, according to the report. Most won’t return to an organization, it
said, adding that the self-employment movement will explode over the next two
years.”
Self-employed individuals who plan to buy a
home are wise to strategize several years in advance. If you understand how
lenders consider mortgage applications and self-employment income, you can take
steps to make yourself more appealing. Let’s look at some general guidelines
for making you look attractive to that entity who would make it possible for
you to become a homeowner.
Lenders are all about the risk they will be
taking on when they look at your mortgage application. They want to make sure
they'll be able to get back the money they lend you, so it's important that you
show enough income to cover the mortgage payments easily. This isn't that hard
when you have a regular job to go to and steady paycheck showing a pattern of
healthy income. For a self-employed individual, however, income can fluctuate.
One month may find you in the pink, making more investments in your business,
and the next might see you struggling to pay your bills.
The MotleyFool’s Kailey Fralick puts it this way: “You may
also have to provide a list of your existing debts and assets. Business owners
may have to provide profit and loss statements from the last couple of years.”
It’s also important to know that lenders
consider your income after deductions, which means you must be extra
careful with write-offs, such as phone and internet services, office supplies,
business trips, etc. While taking those deductions may help to lower your
taxes, it also lowers your usable income in the eyes of mortgage lenders which,
in turn, raises your debt-to-income ratio. That ratio is a measure of how much
money you have coming in and going out each month. Guidelines for those ratios
vary from institution to institution and it’s a great idea to sit down with
your CPA or mortgage lender to determine how many deductions might be feasible
when you are preparing yourself to qualify for a mortgage.
And don’t forget about that pesky credit
score. It’s a measure of how responsible you've been with borrowed money in the
past, and it’s of great importance to lenders. They may hesitate to lend to you
if you have a number of late payments or they determine that you use credit too
often. It's vital to keep your credit score as high as possible if you want to
give yourself the best chance of getting approved.
For more information please
contact me at 808-457-2455.
Thank you for visiting my blog, I encourage you to leave a
comment or questions. Let
me know if my blog has helped you. I would love to hear your thoughts and any
ideas for future posts.
Roxy Redenbaugh
ACMC Loan Consultant
Mortgage Coach
Branch Manager
NMLS #269926
Source: TheMotleyFool, FreshBooks, TBWS
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