Buying a house may be a challenge if you’re self-employed, but that doesn’t mean it’s impossible. Here are some things you need to know if you own your own business and you want to buy a house.
Deductions May Make It Hard to Get a Home Loan
If you take a lot of deductions to reduce your tax bill, that may make it difficult to qualify for a mortgage. You may have a high enough gross income to meet a lender’s requirements, but the lender may only consider your taxable income. That’s important because the lender will look at your debt-to-income ratio when deciding whether to approve your mortgage application.
A lender may add back deductions, such as depreciation, since that’s not an expense that you actually paid. Taking as many deductions as possible in other areas may create a roadblock though.
Inconsistent Earnings May Be a Problem
A lender will want to see that you have a relatively long record of consistent or increasing income from self-employment. If your earnings go up and down from season to season or from year to year, or if you receive a large amount of money all at once, you may have to explain that your business goes through cycles and provide several years of tax returns.
The Lender May Require Lots of Documentation
Depending on the circumstances and the lender, you may have to provide one or two years of tax returns. You’ll also have to provide statements related to your bank, credit card and retirement accounts. The lender may request other documents, depending on your specific situation.
A lender will verify your income early in the process and again shortly before closing. You’ll also have to show where you got the money for a down payment. The lender will want to know that you didn’t use business funds or take out a separate loan to cover that.
You Won’t Necessarily Have to Report Income From Self-Employment
If you have a primary job and your self-employment is a side gig, you may not have to provide any documentation related to your self-employment income if you don’t need those funds to meet the lender’s requirements. If you’re applying for a mortgage with a co-borrower and one of you is self-employed, but you can qualify for a loan without income derived from self-employment, you may not have to document those earnings either. That may be helpful if the business earns a small amount of income or is a loss on paper because of tax deductions.
Seek Professional Advice
If you are self-employed and you want to buy a house, talk to your accountant about the documents you will need. If you want to purchase a home a year or more in the future, changing the deductions you take to keep your taxable income up may help you qualify for a home loan. Your accountant may also advise you to amend previous tax returns or to take other steps.