Self-Employed? What You Need to Know When Buying a House

Being self-employed comes with many perks like flexibility, freedom, and being your own boss. But when you’re buying a home, you’ll need to navigate the process a little differently than someone with a regular, W2 income.

If you’re self-employed and thinking about buying a home, these are the two things you need to know to set yourself up for success.

1. Stop Writing Everything Off: Since you’re self-employed, you likely take advantage of tax deductions to lower your taxable income. That might be great for tax season, but it’s not so great when it comes to qualifying for a mortgage. Lenders look at your net income (aka your profit after deductions on your taxes) when determining how much you can borrow. When you write everything off, your net income will look much lower than it actually is and decrease your purchasing power.

In the two years leading up to buying a home, be cautious about what you write off. Focus on showing the full amount of your profit on your tax return so you can maximize the amount you’re qualified for.

2. Have Two Years in the Business: Lenders look for borrowers with financial stability when approving loans. For those who are self-employed, lenders get even more particular. You’ll need to show at least two years of tax returns from your business to demonstrate stability.

You’ll also want to show steady or increasing income when you go to get pre-approved. If you’ve just started your business or your income fluctuates significantly, you may need to wait until you can provide two years of solid financials before starting the homebuying process.

Getting financially organized ahead of time will help you have a smooth homebuying experience. Talk to a lender early in the process to understand what they’ll need from you and how your specific self-employed situation might impact your loan approval. By following these steps, you’ll be ready to navigate the process with confidence.