For a growing number of people living in Albuquerque, self-employment is becoming a reality. Many people are already working for employers from home. But for those who are self-employed, working from home is a regular scenario. Self-employment is on the rise. FreshBooks’ second annual Self-Employment Report found that, “Some 27 million Americans will leave full-time jobs from now through 2020, bringing the total number of self-employed to 42 million.” The report defines self-employed professionals as those whose primary income is from independent client-based work.
Being self-employed does have many obvious benefits. But it can make it difficult to buy a home in Albuquerque. Lenders want to make sure that buyers have the income to pay the mortgage. They’ll need to see that your income is high enough to pay for the mortgage and likely to continue, and that you have a good track record of repaying your debts.
If you’re self-employed, how can you get yourself in a better position to buy a home in Albuquerque?
What do you need to show?
Showing two years of steady income is a basic requirement for just about any mortgage, but those who have an employer other than themselves may have more flexibility. Other factors, such as income, savings, down payment, and debt-to-income ratio can make that two-year rule less critical.
Those who are self-employed, however, will want to show as much income history as possible. Mortgage lenders typically require self-employed individuals to show two years’ worth of self-employment income to prove that they have a steady revenue stream. In addition, you’ll have to provide tax returns from the last two years, and you may also have to provide a list of your existing debts and assets. Business owners may have to provide profit and loss statements from the last couple of years.
How to treat business expenses
Adding to the challenge is the fact that lenders are going to be looking at your income after deductions. Self-employed workers also might write off a significant portion of their income as a business expense, minimizing the size of the mortgage they’re able to obtain. Because mortgage underwriters typically look at income after expenses, your taxable income may be too small to qualify for the mortgage you want.
Managing your debt-to-income ratio
Most mortgage lenders will not give you a loan if that ratio is greater than 43%—that is, if more than 43% of your income is going toward paying off debt each month. That debt-to-income level is key in any mortgage approval scenario, but takes on added importance when everything is under a self-employment microscope.
It’s important to make sure you keep your debts down to a manageable level. They should never exceed 43% of your income, and it’s best if you can keep your obligations under 36%.
How’s your credit score?
Credit scores are even more important if you’re trying to prove you’re worthy of being approved for a mortgage. Even if you’ve been wildly successful after striking out on your own, having a lousy credit score will hinder your chances of getting a good rate on a mortgage. Checking your credit before you start applying will give you an opportunity to pay down debts or spot errors on your report that could be dragging your score down.
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