This is the “# 1 mistake” people make when trying to buy a home.
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More Americans than ever are quitting their jobs, according to April government data – and many of them plan to work for themselves. At the same time, mortgage rates are very low (compare today’s mortgage rates here)So it shouldn’t be surprising that more than one in 10 people who say they want to buy a home at some point in their life hope to do so in the next 12 months, according to a Nerdwallet survey.
But starting your own business and trying to buy a home at around the same time can cause major problems: “The number one mistake people make when they want to buy a home is changing jobs or starting their own. own business the same year, ”said Dana Taurus, a real estate agent with Sagan Harborside Sotheby’s International Realty in Marblehead, MA. “A W2 employee will propose [the lender] that historical source of income that you may not have as a new business owner. (FFind the lenders with the best rates here.) In short, it can be difficult to get a mortgage if you are new to self-employment, but it is not impossible. Here’s what you need to know.
Prepare for a lot of paperwork
Lenders want to know that you have a strong business with stable income now and in the future. It’s a lot harder to prove than for a full-time worker who can pull out a W-2. You will likely need to prove that you have been self-employed with income for about two years or more, which may include income tax returns, profit and loss statements, your business license, customer information, and / or accounting records. You will also be asked for bank statements, assets, other sources of income, and more. (FFind the lenders with the best rates here.)
Understand that this is your net income
Does your new business go gangbuster in its first few months? That’s great! But be aware that lenders will look at your net pay, not your gross pay. This means that lenders will want to see what you’ve earned after taxes and expenses.
When you set aside all the things you need to run your new business, like office space, transportation, and meals with clients, you’re actually reducing your taxable income. It could be seen as a strike against you when you are applying for a mortgage. “I’ve seen people’s income tax returns show that they only made $ 10,000. But in theory, they were making $ 200,000 a year. They’ve written off so much because of the expense, ”said Christian Wallace, Head of Real Estate Services at Better.
Smooth out unstable income spells
Full-time employees often only need to think about their income during tax season. But if you’re self-employed and looking to apply for a mortgage, every financial quarter is another opportunity to prove to a lender that you earn regular income – and start one if you don’t.
For example, if you’re starting a business that’s going to make most of its money during the summer months or the holiday season, take the time to understand how you can add new sources of income during your off season, suggested Wallace. .
“Say you are starting a landscaping business, which is very popular six months a year,” Wallace said. “By incorporating Christmas lighting or leaf cleaning, you offer different ways to show a full 12 months of income that year versus those busy six months. ”
Take the tour and know how to increase your chances
Some lenders may be more willing to hire new freelancers, experts say, so shop around. (FFind the lenders with the best rates here.) And before you do, know that there are some things, even beyond a great credit and income rating, that can help you in your case: this includes the ability to make a large down payment, a bunch of savings in the bank. and little debt. This shows the lender that you would likely pay off that mortgage even if your business went south.
Remember to prioritize
It might seem unfair, but if you’re thinking about quitting your job and buying a home this year, you may have to choose one or the other, at least for now. Waiting a year or two for you to show lenders that you have a stable, reliable source of income can go a long way in helping you get the mortgage you need to get the home you want.
It can also help to talk to a loan officer about how to plan and what you’ll need to get to where you want to be in a year or two, Bull said. “If you’ve dreamed of becoming a photographer or opening a business, but also want to buy a house, you’ll need some time to plan for that,” Bull said. “Because if you’re the one applying for the loan, you might not be able to accomplish both in the same year. “(FFind the lenders with the best rates here.)