Working for yourself has many benefits that often requires a delicate work-life balance. Although, small business owners are frequently challenged to keep accounting records for a business and their personal finances separated. Perennial Funding offers insightful home buying tips for individuals who are self employed.
Avoid Financing Business Purchases in Your Name
As an entrepreneur, you might encounter situations that require you to personally guarantee the payment of certain business debts. However, you should minimize these arrangements while you are planning to buy a home.
Maintaining separate bank accounts and credit profiles for you and your business could reduce the amount of debt that you are responsible for paying. Keeping a debit card or a credit card that displays the name of your business will enable you to prove that certain expenses are company paid. For instance, you will be able to obtain a bank statement that reflects payments from your business account for specific debts.
Get an Understanding of Your Earnings
When a wage earner is shopping to buy a home, a lender will request a copy of the borrower’s W-2’s for the last two years.
Lending guidelines were initially created for working families with stable sources of income. As entrepreneurship became more prevalent, mortgage lenders needed to devise a method to underwrite home loans for self-employed individuals with variable earnings.
Unlike an individual who receives a W-2, a portion of your earnings will typically be allocated toward inventory or operating expenses. Therefore, your gross sales are not used to determine how much money you are making.
Pay Creditors As Agreed
In addition to paying your rent on time, you should also pay your other creditors as agreed. A strong credit profile and an above-average credit score could enable you to qualify for favorable interest rate loans or for loans with limited financial documentation.
Save Money for a Larger Down Payment
While you might qualify for a mortgage loan to buy a home with a down payment that is less than 5 percent, you might decide to use additional funds for other purposes, such as a larger down payment, to obtain an interest rate buy down or for financial reserves.
Your savings could provide a financial cushion if you experience slower operating periods than usual. Having three to six months of liquid assets might be a compensating factor that mitigates certain lending concerns.
Gather Tax Records
Tax returns for the last two years as well as a year-to-date profit and loss statement are generally required to buy a home when you are self-employed. An underwriter will typically want to see a completed tax return with all of the schedules.
For instance, certain tax schedules will display income and expenses for your business, such as an investment income schedule (Schedule A-2 / Schedule K-1), rental real estate schedules (Schedule E) or your profit and loss statement (Schedule C).
Attractive home loans are available for self-employed borrowers who are qualified to buy a home. Contact Perennial Funding to get more details about affordable financing solutions for local home buyers.