Are you self-employed and looking to buy a home? The purchase of a home can be absolutely life changing. It can get you out of your cramped apartment and enable you to finally have the home office of your dreams.
However, buying a home can be a bit more complex when you’re in a non-traditional financial situation. There are more considerations to make and greater challenges to face. Read on to learn our tips for buying a home when you’re self-employed.
Explore Non-Qualified Mortgages to Secure a Loan
When applying for a traditional mortgage, most mortgage lenders look to monthly income to determine the terms of a borrower’s mortgage. In order to do so, borrowers typically need to show at least 2 years of pay to verify their income.
For those who are self-employed, it can be a much more complex process. For one, self-employed earners don’t have pay stubs to use as proof. Additionally, income for those who are self employed may come on a varying schedule, with payments in lump sums throughout the year rather than a regular deposit.
A non-qualified mortgage, otherwise known as an Non-QM loan, is a type of mortgage that enables borrowers to qualify for a mortgage without using income verification through paystubs. These are ideal for those in non-traditional income or financial situations such as being self employed, as it provides them flexibility and options for securing a loan with good terms and low interest rates.
When it comes to non-qualified mortgages, there are a number of different options that may suit the needs of a self-employed homebuyer. Take a look at the following options to determine if they work for your needs.
Bank Statement Loans
Bank statement loans enable lenders to verify your income using your bank statements rather than pay stubs. A lender will ask for 12 to 24 months of bank statements for this type of loan. They’ll consider any incoming money you’ve received over the designated time period as income. This is a great choice if your income varies greatly over the course of the year.
Asset Based Loans
If your liquid assets are more favorable than your income, you can use these to secure a better mortgage via asset-based loans. These look at your existing assets, such as your bank accounts, investments, and more to qualify you for a loan. Keep in mind that these may have higher interest rates than a traditional loan.
Interest-only Home Loans
If you’re still working on building your business as a self-employed individual, you may want to explore interest-only home loans. These loans enable you to only pay the interest of your mortgage over the first 10 years of your mortgage repayment. That means you can defer repayment of the borrowed money for the first decade of your mortgage. Once the 10 years have ended, you’ll pay off the entire amount of the loan plus remaining interest over the course of the rest of your loan period.
Account for Tax Season
As a self-employed individual, you probably don’t have taxes taken out of any of your income. As such, you’ll need to pay estimated quarterly taxes. That means that, four times a year, you’ll need to pay a lump sum to the IRS to account for a quarter of your yearly tax liability.
Make sure to take these payments into account when assessing how much you can afford for a down payment and regular mortgage payments. If you’re unable to payback the terms of your payment due to an accounting error, you may be susceptible to foreclosure.
Choose a Home that Fits Your Lifestyle
Do you work from home? As a self-employed person, it’s likely that you’ll spend a lot more time in your home than a traditional office worker. As such, be sure to choose a home that fits your lifestyle.
Make sure there’s plenty of space in the home for a home office in addition to any life changes you expect down the line, like having children or moving an elderly parent into your home.
With tips, buying your first home will be that much easier.