Purchasing a home while self-employed may seem like a challenging feat. After all, the ebb and flow of income can make mortgage lenders hesitant compared to a consistent paycheck. However, it's far from impossible. Freelancers and small business owners can absolutely secure the home of their dreams with a little extra preparation. If you're considering navigating the real estate market while being your own boss, pay close attention. Here are three crucial steps that every self-employed aspiring homebuyer should follow to position themselves as a prime candidate for approval. By heeding these guidelines, you'll be well on your way to securing that coveted pre-approval.
1. Accumulate at Least Two Years of High-Net Tax Returns
Banks, in the absence of a W-2 form, rely on your tax returns to substantiate your take-home income. As a standard practice, they typically request two years' worth of tax returns to confirm the stability of your net income over time. If you can provide more, it's even better.
Jesse Gonzalez, a mortgage broker at North Bay Capital in Santa Rosa, California, suggests that some self-employed individuals may consider reducing their tax deductions as they embark on the homeownership journey. While this may reduce short-term tax benefits, it simultaneously increases your net income, potentially enhancing your qualification for a higher loan amount when you embark on your house-hunting adventure.
2. Amplify Your Savings and Elevate Your Credit Score
While every prospective homeowner should prioritize their credit score, it assumes even greater significance for the self-employed. Lenders perceive your credit history as an indicator of your commitment to repaying the loan, especially during financial downturns. Therefore, make it a priority to consistently make monthly payments on time, well above the minimum required. Simultaneously, focus on reducing your debts as much as possible. In addition to your credit score, channel your efforts into building your savings for the down payment. Although 20% of the purchase price is typically considered ideal, demonstrating the ability to contribute more can position you as a more secure investment.
3. Foster a Relationship with a Local Lender
While large financial institutions may offer marginally lower interest rates, self-employed individuals often find it more advantageous to seek out local lenders. According to Christopher J. Mayer, the Milstein Professor of Real Estate at the Columbia Business School, local institutions tend to be more hands-on and flexible, catering to non-standard financial profiles.
However, don't wait until you're ready to request a pre-approval to establish this relationship. Start today. Holding other accounts at the same bank not only builds trust but also provides you with more options in the future. For instance, selecting a portfolio loan, where multiple loans are bundled together, can enhance your chances of securing a mortgage at a favorable rate.
Feel free to reach out to Scott and the Smolen Team if you have any questions or need a referral to a reputable local lender. We're here to guide you on your journey to homeownership!
