The amount of self-employed workers in the United State is increasing, but showing proof of this income could be a hurdle on a loan application. Companies who contract to self-employed workers file a different document with the IRS called a 1099 form. It reports any payments of six hundred dollars or more that a company makes to a person who is not a normal employee or who operates an unincorporated business for a service.
If you are self-employed and would like to buy a house, here are some key things to know prior to applying for a home loan.
Have all of your documents together
The home loan process will require a lot of documentation and even more paperwork for self-employed individuals. Instead of the standard federal tax return of a single year, you should expect to provide at least two years of tax returns to show your consistent income, especially if you are a contractor who gets commission or bonuses. The documentation obstacle is greater when you are self-employed, so have your list of both your assets and liabilities handy for your lender.
Make sure to not assume that it will be more difficult to get approved
Self-employed individuals go through the same process when they are applying for a mortgage as people with a wage or salary. The requirements are a bit more stringent with more documentation because mortgage lenders and banks would like borrowers to demonstrate income stability.
Be sure to not mix business with personal
Smaller business owners should not mix business expenses with personal expenses because it could make an impact on your credit score. It could also be more difficult to establish business profit and loss.
You should instead open a business bank account and charge items related to work such as client dinners supplies and other expenses through a business debit or credit card. It will be much easier for a mortgage lender to see and evaluate all your liabilities.
You should keep your credit score stable
The interest rate you get for your home loan will be based on your credit score. A higher credit score means that you will qualify for the low mortgage rates. This could save you thousands of dollars over the life of your loan.
Your first step should be to check your credit score and credit reports. Fix any reporting mistakes you find and work with your mortgage lender on ways to boost your score such as lowering your credit utilization rate or consolidating high interest debt with a personal loan if you are not purchasing a home right away.
You also should not close out any credit card accounts even if you have paid them off. The length of time you have had open lines of credit factors into your credit score and closing accounts could decrease that score.
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Your down payment amount and debt-to-income ratio will also make an impact on your credit score. Make sure to avoid making any large purchases prior to your loan closes because it can impact your credit score and increase your interest rate. For instance, purchase your household appliances, couches, tables or other high price items after you sign all of the paperwork.
Do you have a question about self-employed mortgage options? Click here to contact Self Employed Specialists today!