Many people have weathered the latest recession (since 2008) by starting their own business in the past few years (2010, 2011, 2012 for example). While being self employed can have great advantages and bring a lot of freedom, it can be very challenging when it comes to qualifying to buy a home. Even with great credit you’ll need to make sure you pay attention to the following home buying financing guidelines if you successfully want to navigate through the home buying process.
First of all, if you are working for yourself congrats and the most important guideline you’ll need to know about is that you’ll need to be self employed for at least 2 years. The way you’ll prove this is with your tax returns. The lender will ask for your latest 2-3 years tax returns. It may be possible to make a case for less than 2 years self employment if you came from the same line of work and your business is going strong, but you’ll need to make a strong impression if you plan to go this route. You may also have to provide a quarterly profit and loss statement depending on the specifics of your deal.
A tip about being self employed – one of the advantages of working for yourself is you get to write off a bunch of expenses against your income versus what you can write off as a W-2 employee for someone else. So be careful how much you write off against your income because you can reduce your income too much such that you’ll knock your self out of being able to qualify for the house you really want.
Next, credit – keep your credit good. With being self employed it is even more important to have a better credit file – if only for the sake of “looking good.” An underwriter looking at your file is going to weigh favorably on a better credit file – credit scores 640 or greater. Most loan programs also require credit scores of at least 640 or higher.
A tip about renting – if you rent and trying to qualify to buy a house in Arizona make sure you pay your rent with a check. You may be required to prove you have been making a rent payment and the best way to do that is to get copies of your cancelled checks from you bank. Having your landlord write you a letter, or having a management company write you a letter may not be strong enough depending on your situation. It is best to cover you tracks with being able to prove with cancelled checks that you have paid your rent payment on time for at least 12 months.
Last up, money in the bank and reserves. Any lender is going to ask you for at least your last 2 months worth of bank statements. Count on having enough money for at least 3.5% down payment plus your closing costs – and – 2 months reserves based on your new mortgage payment. As a self employed borrower lenders will for sure want to make sure you have a little emergency back up money when they give you your mortgage.
A tip about your money – you need to understand that if you are planning on using money out of your business you’ll need to account for that in how you present your loan to your lender. If you can make arrangements at least 60 days in advance to move funds into your personal checking/saving account. This is the same if you are planning on getting a gift from someone who isn’t a close family member (brother/sister/parent/uncle/aunt). You have a 60 day window where you don’t want to be making large deposits into your personal account unless you are prepared to prove the paper trail. There’s more about money, but the best thing to do is talk to your loan officer up front if you are planning on pulling money together from multiple sources to buy a home.