Buying a home is a dream for many of us. But while it’s daunting enough for W-2 employees, it’s even more complex for the self-employed. That’s not to say, however, that it’s impossible.
If you are self-employed, a freelancer, or a contract worker who’s ready to own, here are some things to consider.
Self-employment and homeownership
More and more Americans identify as self-employed, but they still lag behind their peers when it comes to home buying. Why?
In a recent Housing Wire article, Alcynna Lloyd referenced a report by Urban Institute that highlight the disparities self-employed borrowers face in comparison to salaried households. It states: “There is wide recognition that self-employed people find it more difficult to get approved for a mortgage than people who receive a regular paycheck. The self-employed can be more difficult to underwrite in part because they, unlike salaried workers, experience greater income volatility and lack pay stubs or W-2 wage statements that make it easy for lenders to verify and document income.”
So, what can you do?
One of the most important things that you can do is check your credit score — specifically your FICO score. What is a FICO score? The more you know about your score, the more prepared you will be when it is time to either apply for a mortgage and/or work with a lender.
Lenders will look at various things, but one of the most important is your debt-to-income ratio.
To determine income, lenders will ask to see proof. For most Americans this will necessitate showing W2s or previous years’ tax returns. Because of the onset of subprime lending in the early 2000s, today, many traditional banks and online lenders have become stricter about income verification.
Without meticulous records, it may be difficult for someone who is self-employed to show sustainable income — especially when their monthly income varies. Again, the key for the self-employed is preparedness and, if necessary, some extra help.
Large banks like Chase will often offer resources (e.g. pamphlets, videos, and online tutorials) for potential home buyers. Local branches may even have someone in-house who will review your credit and income verification documents to ensure that you have everything that you need and that you are headed in the right direction. They will also address ways to increase your credit score, reduce your debt, and document supplemental income — all of which might help improve your chances of securing a loan.