Self-Employment and Buying a New Home.
Self-employed?
You’ve chosen a path which gives you the flexibility to determine your style and momentum of doing business – there is no doubt about the excitement in this. Being self-employed also comes with a different fiscal responsibility.
There are many blogs and articles out there that you have probably looked at regarding being self-employed and purchasing a home. If you are currently a homeowner or purchasing your first home and you are self-employed there are specific criteria that will generally determine your eligibility to purchase a home. I want to mention a few things that will be helpful to you:
➢ In most cases you will want to have a minimum of 2 full years in practice and will need to supply your lender with complete tax returns (business and personal, including K1’s, if applicable). Your lender will generally be doing a 2 year average for their analysis of your income. Your loan officer will need all partnership returns, however if your interest is less than 25% they should only need the K1. If you have an interest in any partnership or corporation with a 25% or more interest you will need the full return. If you receive self-employment income in the form of a W2 or 1099 you will need those documents for 2 years as well, and if you pay yourself throughout the month you will also need to provide paystubs for 1 month. Depending on when during the year you apply for the loan you may need an audited year-to-date profit and loss. Audited means it has been prepared by your CPA. If you are considering a purchase at the beginning of a new year you may want to have your return completed as early as possible vs. filing for an extension, especially if the most recent year will show an increase to your income. There aren’t any substitutes for actual tax returns when you are self-employed
➢ If your business tax returns show any mortgages, notes, or bonds due and payable in less than 1 year you will need to support that either you have funds available to pay that note when due, or that it is renewable or has been renewed
➢ If you have any monthly obligations that are being reported on your credit report that are paid by the business you will want to let your loan officer know that. If you can support that those payments have been paid by the business for at least 12 months and evidence that by providing cancelled checks or bank statements from the business your lender may be able to exclude those payments from your personal debt-to-income ratios. Most lenders allow up to 43% of your gross monthly income for a new house payment (includes: principal & interest, taxes, insurance, and HOA’s), plus any other monthly installment or revolving obligations. This may make a difference in your borrowing power
➢ If you intend to use business assets for your down payment or cost to do the loan you will need a signed letter from your CPA indicating that using those funds will not be detrimental to the daily operations of your business. Not all CPA’s will provide this and you will need to be sure you have adequate funds in your personal account to show evidence of funds needed. I recommend having this in place at least 90 to 120 days prior to purchasing a home
Depending on the lender you may be able to apply for a loan with a minimum of 1 year of tax returns; business and personal, although 2 years is the industry standard. When it comes to filing taxes being able to have deductions is always helpful, however if you are considering a purchase you may want to look at what income you will need when you get ready to file.
Making sure your financials are in order as a self-employed borrower will make the process much easier for you, as there is more that is needed than if you were a W2 employee and working for someone else. Anything you can do to be as prepared as possible will be to your benefit.
Doctorloanprograms.com contributor