For some, being self-employed is the ultimate way to experience the American Dream. You can make your own hours, work from home and enjoy an optimal work/life balance. Many independent freelance workers also wish to fulfill their dream of owning a home.
You may be asking yourself, “Am I considered self-employed?”. If you have a 25% or greater ownership interest in a business are considered to be self-employed. This includes freelancers, independent contractors, small business owners, etc.
Being self-employed presents a unique set of circumstances when it comes to qualifying for a home loan. There are specific ways of approaching this process if you work for yourself and you are looking to buy a house.
Show Them the Money!
As a self-employed worker, a lender will need to see clear evidence that you are financially solvent. You can assist in the process by filling out IRS Form 4506-T. This will grant the bank permission to access your tax returns from previous years.
Maximize Your Credit
Another way to make yourself an attractive borrower is to boost your credit score. You can do this by paying off any outstanding debts such as vehicle leases, student loans and credit cards. A credit score in the mid-700s is considered good and anything over 800 is excellent. A high credit score can secure you a low interest rate which will save you thousands of dollars over the span of your loan.
Use More Money for Your Down Payment
Having a significant amount of cash for a down payment is another way to convince a lender to work with you. A bank is more likely to approve your loan application if you are able to put down at least 6% of the loan and as much as 10%. Some lenders will grant a loan with as little as 3% of the loan’s value, but a bigger amount offers the benefits of a lower monthly payment and interest rate.
Work With the Best
If you choose a well-established company, they may be able to refer you to a preferred lender with a track record of successfully working with their clients. If you are shopping for home builders in St. Louis, consider Rolwes Company — a third generation builder known for quality homes and superior service
As a self-employed worker, you are entitled to a specific array of credits on your tax return. While this is attractive in the short-term, it is a good idea to minimize your deductions if you know you’ll be applying for a loan in the next two years. This will help you show a higher taxable income which makes you a good candidate for borrowing money.
Know Your Money & Spending Habits
It is also an advisable strategy to know your finances well and to understand how they will affect your loan application. You’ll want to know your debt-to-income ratio (DTI). This should reflect that your housing-related payments don’t exceed 29% of your income and that your total routine debt payments don’t exceed 36% of your income.
It is possible to borrow money as a self-employed future homeowner if you follow a few basic principles. Contact us to learn more about working with our preferred lending institutions that specialize in home loans.
This post was written by Madison Nedrig