By Grant Spencer, Rochester Hills Branch Manager
Buying a home can be a complex endeavor for anyone, but add the additional aspect of being self-employed and the process can get complicated. When buying your new home as a self-employed person, there are some things you should know ahead of time.
It’s not what you make, it’s what you claim. Like most small and medium sized business, the income a lender will use to qualify you isn’t based on how much your business made, but rather how much was claimed to the IRS after deducting business expenses. If you’ve made 1 million in net revenue in your business but only show $50,000 in income to the IRS, your lender can only use the amount you paid taxes on.
See your mortgage expert early. Being self-employed creates additional layers of complexity to the mortgage process. The type of business you own (LLC, Sub Chapter C/S, Sole Proprietor, etc.) can make a substantial difference in the process to get a loan for your new home. Visit with your mortgage expert ahead of time and bring your tax returns to see what you need to qualify for and what you’d need to do in order to qualify for the home you want.
Register your business and license it. The more your business is able to be verified, the easier it could be for you getting a loan.
Pay yourself a W2 wage rather than taking the profits directly. This may require changing the foundation of your business to a corporation, but it provides you a great deal of ease in getting a loan, by paying yourself a wage instead of taking an owners draw.
Lower your personal debt. By paying off personal debt, you could qualify for a higher loan amount because of your lower debt-to-income ratio.
Reduce your tax deductions. One of the big reasons that self-employed borrowers have a hard time qualifying for homes is take too many deductions, which decreases your income for your year. Showing a higher income is a good step to qualifying for your dream home.
Keep your business and personal accounts separate. You also need to be aware of what debts you personally pay for and which ones your business pays for. Debts that are for the business and are provable cannot necessarily be held against you. Canceled checks and business bank statements are important in making this happen.
Maintain good business records. Your lender isn’t a mind reader. While you may know what income and expenses you have, your lender does not. Maintaining a clear profit and loss as well as good business accounting practices will paint a clearer picture for your lender.
Consider a larger down payment. Consider pulling from a 401k or IRA if your business write offs make your debt-to-income ratio high.
For questions regarding a loan, contact our team at 877.312.9033.