What you need to know as an independent contractor or self-employed worker before you decide to buy a new home.
By: Michele Corral, Realtor®️
Entrepreneurship or even a side hustle can be exhilarating and give a sense of independence when you experience success. With the rise of the Gig Economy, many people are joining the movement to #beyourownboss. Increased flexibility and and the ability to work and earn at your own pace are excellent benefits to being an independent contractor. With all that cash flow and flexibility, you may want to move up in house or find a new place that has the perfect space for your in-home business.
Before You Find The One
What do you need to know before you start shopping for that extra room? Whether it be a perfect LuLaRoe closet, space to Study with high-speed wifi, or a perfect home Elizabeth Banks is waiting to show you on realtor.com, go into the search financially well-educated.
What will a Lender look for?
When you are looking to own a home and obtain a loan, lenders will look at the some of the following items:
- Credit Score
- Cash available for down payment and Closing Costs
- Increasing Income
- Existing Debt and Financial Obligations
- Work History
Debt and financial obligation examples would include credit cards, car loans, student loans, consumer loans, child support, alimony.
The Housing Expense-to-Income-Ratio -A ratio comparing housing expenses to before-tax income that is used by lenders to qualify borrowers for a mortgage.
The housing expense measure includes mortgage principal, interest payments, property taxes, hazard insurance, mortgage insurance and association fees. A higher ratio may be accepted based on compensating factors such as a low loan-to-value ratio and/or an excellent credit history, or applying jointly with a co-borrower. It is sometimes referred to as the “front ratio”.
The Debt-to-Income Ratio – a comparison or ratio of gross income to housing and non-housing expenses It is sometimes referred to as the “back-end ratio”.
When you become self-employed or have 1099 income, lenders will be expecting you to document your income. If you just started in the last 4 months and have a booming business, your lender may not be as excited as you. Underwriters are looking for two years of federal tax returns. They will average the two years and are also looking for an increasing or steady income, rather than a decrease. To a lender, decreasing income will make you seem like a greater risk, and may result in your pre-approval or loan application being turned down.
Watch out for deducting too much on your taxes. The lender can only count your net income, not your gross sales. So, although you may be able to deduct all kinds of business expenses, it would be wise to look at it from the lender’s perspective and how much money you will have leftover to pay a mortgage. The one exception to this is mileage. They are often able to give a credit for deducted mileage.
If you have questions about your specific situation, contact Brian Rulison at The Federal Savings Bank before you are ready to start packing. And, kudos to you for taking your future in your own hands. Now, get back out there and enjoy your hustle.
Michele Corral, Realtor®️
Crossland Real Estate
facebook: Michele Corral, Realtor
Tags: credit score, deductions. entrepreneurship, Expense to income ratio, home loan, housing expense, income