Hardly a day seems to pass without bumping into someone who proudly declares they are self-employed. This, I’m sure, isn’t just a Central Oregon phenomenon. But the challenges of buying a home, whether it is a first or second home, and obtaining a mortgage you can live with, can be more work than you’d expect. You may be successfully self-employed, in part because you are willing to take what would be out-sized risks, but your mortgage lender might not be as willing to take a risk on you. So I thought I’d offer a couple of tips, some of them common sense, to make the process more tolerable.
Do you have a stable income stream?
While being self-employed comes with risks, a regular paycheck and proof that you will have one in the future are often not part of your portfolio. Long before you begin shopping, get a pre-approval letter. This is not a guarantee of a future loan but instead, a ballpark amount you can work with. This letter used to be issued without much in the way of documentation. No more. This letter will show the broker/realtor that your credit and income have been verified – with documentation. There is an upside though. Even though it is only a pre-approval, it will make the actual mortgage a little easier to obtain.
How long do you need to be self-employed to qualify?
You may have heard the term “gig” economy, or perhaps one of the other monikers such as “solopreneurs”, or “free range humans” or even “portfolio careerists.” While government agencies are still trying to define and track this new workforce, lenders have already laid down some strict guidelines for the self-employed.
For instance, if you have been self-employed for less than two years, your chances of getting a mortgage may be slim to none. But two years is plenty of time to fix whatever might create a roadblock to getting a mortgage.
What can you do to help the process?
It might help to incorporate as well, something freelancers are loathe to do. The reason you might consider this is the debt your business might carry. Incorporating can shift the debt and liability to the business and away from your personal income statement. The deductions you may be using for personal tax savings might go away, but as one tax accountant once told me, “You can’t have it both ways.”
Since your income is a consideration, and many entrepreneurs tend to put money back into the business. Give yourself an adequate income and make sure it appreciates over time. You can achieve a steady income as a sole proprietor, but lenders want to see a history, which is why they use the two-year rule.
The two-year rule can be beneficial in a way. It will give you time to focus on your debt to income levels and if your credit is in need of repair, two years of prudent financial management might be all you need.
It is also a good time to beef up your retirement accounts (shows stability and for a jumbo mortgage, in excess of $417,000, it qualifies as a reserve), save the down payment (while you may be able to buy with less than 20% down, try to get the full 20% to avoid the PMI – private mortgage insurance), and lastly, define what you really want in a house and where.
How may we assist you?
On behalf of The Jones Group @ Sunriver Realty
Nola Horton-Jones, Principal Broker/Realtor | ABR, C-RIS, e-PRO, GREEN, RSPS, CCIM Candidate
Bryce Jones, Broker/Realtor | ABR, CRS, e-PRO, GREEN, GRI, RSPS, SFR
Karen Marcy, Broker/Realtor
The Jones Group @ Sunriver Realty | 57057 Beaver Drive | Sunriver, OR 97707
Mobile: 541-420-3725 | Mobile: 541-420-4018 | Mobile: 503-327-9611 | Fax: 541-593-5123
Licensed in Oregon