According to the Pew Research Center, roughly 10% (or 14.6 million people) of the U.S. labor force is self-employed. In the era of Uber, Luxe, WashClub, and countless other “gig economy” jobs and careers, those who choose this path face a number of unique challenges. In addition to their taxes to health insurance to retirement, the self-employed may find that getting a mortgage isn’t so easy, either. Without a W-2, such an individual might think that applying for a mortgage is hopeless, or just not worth the hassle.
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If this is you... fear not! Here are six great tips (via Redfin) for those of you who are house-hunting while self-employed.
1) You can still get an FHA loan! The FHA (Federal Housing Administration) mortgage is designed with the first-time or middle/low-income borrower in mind. Although you’ll be required to pay a monthly mortgage insurance for the life of the loan, an FHA loan is a great tool for the family looking to buy their first home. But if someone tells you that self-employed borrowers aren’t eligible for an FHA loan, don’t believe it. Although you’ll be required to document your income (keep good records!), self-employed income is counted the same as W-2 income, so that alone won’t disqualify you.
2) Check your deductions. While you likely enjoy some of the tax advantages of being self-employed, some of those deductions could come back to haunt you when applying for a mortgage. Just remember that when you apply for a mortgage, some lenders will look at your tax returns, which will show your income minus your deducted expenses. Make sure to ask your lender about this early in the process.
3) Separate business and personal. If you don’t already, make sure your business and personal finances are separated. If you’re audited, you’ll be required to show them separated.
4) Do your research. Many different types of loans are available, so don’t be discouraged that a vanilla, 30-year fixed-rate loan is your only chance. Lenders have a variety of programs designed for different niche markets, and have unique features, like allowing the borrower to borrow from a family member, borrowing from a retirement account, or creative ways of verifying income.
5) Plan around any tax payments. As self-employed, you may be paying large tax payments throughout the year, so make sure that you’ve planned your closing date and down payment around these tax deadlines.
6) Have a backup plan. As any experienced self-employed will tell you, a sizeable savings is a must. In addition to just good planning, that emergency account can turn into a super-sized down payment.