Being self-employed has a lot of advantages. You can choose your own hours, wear what you want, decorate how you like, and generally are in charge of your own destiny. When you’re paying yourself, though, it can be tough to qualify for a mortgage since your take-home pay can be both hard to verify and change often. You shouldn’t worry too much, though. Even though you’re self-employed, you can still buy a home.
9 million people in the United States are self-employed. They may make a good living, but they still have difficulty qualifying for a mortgage. A borrower typically has to show 2 years of revenue to buy a home, but this may not accurately reflect your take-home pay during that period. When you are self-employed, it means something totally different to the IRS than it does your mortgage company. If you are doing the books to save money on your taxes, it can show less income and hurt you on the mortgage application.
Tax deductions, from retirement plans to business meals and entertainment to interest on business loans or business credit card interest, lower your tax burden but make it seem like you’re making a smaller income. However, mortgage companies see your paycheck after tax deductions. This ends up showing your income as below your actual take-home pay and can lower the amount that you can get for your mortgage, or cause you to be rejected entirely.
If you’re self-employed, there are ways to combat this. You can write off less in the two years before you apply. Make sure that your business and your personal accounts aren’t shared. You can open business credit cards and accounts to help combat this, as those debts can be counted against the business and not your bottom line.
Also, make sure that you’re buying on a high swing. Seasonal swings are ignorable by mortgage lenders, but huge year to year spikes make us nervous. We want you to be able to make your payments every month, and making different amounts yearly can make you look less reliable. The best way to combat this is to apply after a couple of steady years, showing that your income won’t dip and jump.
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