Buying a home as a self-employed professional can be a bit of a tricky combo for some. And yep, Covid-19 complicates things even further…
Do’s + Don’ts:
1. Hold off on any major purchases, like that sexy crushed velvet Joybird sofa that caught your eye. Those things can wait until you have the key to your new home in hand.
2. Talk with your lender and/or tax person/accountant BEFORE filing taxes for the year. Just shoot them all an email once you’re done reading this, and let’s get started.
3. Advice from seasoned professionals is typically FREE. Don’t be afraid to check in with everyone for the best course of action, and don’t ever be afraid to seek out second opinions.
Let me kickstart all this with a story: I was once chatting with a dear friend when she casually mentioned that she was on the verge of quitting her job and starting up an amazing small business… and then a few months later, she wanted to buy her perfect Portland house.
I kinda freaked out on her. “If you quit your job and start a business, you won’t be able to get a home loan as a self-employed professional for a minimum of two years – but more likely, five. If you try to get a mortgage while you’re self-employed, you’d be screwed.”
My friend’s jaw dropped. “Wtf should I do, then?”
“You buy a house in Portland right the fuck now, honey. You literally lose your opportunity to be a homeowner this year if you quit and strike out on your own. Suck it up for a few more months, and let’s find your home, NOW.”
As you can tell, I have opinions about how to go about being a business owner or an independent contractor and purchasing a house. I work with self-employed people all the time, and as a real estate agent, I’m self-employed myself. And it’s the best decision I ever made. The freedom and creativity that being an entrepreneur allows is unparalleled. That being said, running your own business can have serious drawbacks, and buying a home as a self-employed person is one of them. But don’t sweat it, you’ve got this!
Step 1: Talk to your tax person
Buying a home while self-employed takes careful planning, some foresight, and a smart tax person. You gotta have that taxable income! And a fair amount of it. If you haven’t filed your taxes for a few years or are behind on paying them, that is a whole other can of worms. Believe me, a bank won’t give you a second glance for a home loan if you’ve been lax with your tax.
Step 2: Talk to a lender
You usually need an average of at least two years of taxable income before a lender will even consider giving you a loan to buy a home (and this is why I freaked out on my friend when she was going to quit her job right before she bought her first house).
We all know that those first few years of starting a business can be brutal. And even if you kill it that first year and rake in tons of cash, you still don’t have the two years of self-employed tax history that lenders insist on. You’re right, it doesn’t seem fair, but that’s just the way it is, friends.
And of course, there are additional levels of complications thanks to Covid-19. Here’s what Jen Leon, one of my preferred PDX lenders, has to say on it:
“Every lender at this point in time is looking for a strong profit and loss statement, especially due to Covid. They want to ensure that earnings haven’t taken a backseat comparatively to previous tax returns that are filed. That’s been the biggest hiccup with self-employment – unfortunately every lender is going to use a conservative profit and loss with less income verses a strong tax return from 2019.”
And here’s some wise words from Adesina Cameron, another preferred local lender of mine, who can tell it better than I can:
“It’s a smart idea for anyone to check in with a lender 2-3 years before they want to buy. But when you’re self employed, it’s critical that you work with a lender to have a plan to qualify for a mortgage. You want your lender and your tax person working together as a team to get you qualified. I often work with CPAs to make sure they understand how I calculate income BEFORE they file. Your CPA can share the draft taxes with your lender to see if letting go of a few deductions is worth it, because the tax savings is minimal, but the increased income is the difference in qualifying or not. During COVID-19, mortgages for the self employed have gotten even tougher. So if you keep sloppy books, or have been procrastinating in doing your 2020 bookkeeping, your lender will give you some encouragement and guidance to get your shit in order before they can pre-approve you.”
Step 3: Don’t write everything off
Your lender is going to be looking at TAXABLE income when they are qualifying you for a loan. The more you write off as expenses, the less your taxable income is. The problem is, when you become your own boss, you’re trying real hard to get every write-off possible in order to lessen your tax liability. As a result, your income will seem very, very low. And when you’re trying to impress your lender with how much you’re earning, you need the opposite to happen. You need your adjusted gross income to be nice and high!
Jen’s got you for a snippet of sage advice:
“Love my self-employed clients, but I don’t love when they write off every donut purchase at Starbucks.”
Step 4: Pay your taxes
The only thing guaranteed is death and taxes, right? Well, the taxes part is definitely essential in getting a loan to buy a home. Every single time you get paid, set aside a percentage that you and your tax person have agreed on so when tax time comes around, you’re prepared. This is big Virgo energy, and I promise you, it’s the easiest and least stressful way to go about it.
And if you are behind in your taxes, set up a payment plan with the IRS. Because in a lot of cases, if you’ve jumped through all the other hoops, you can still buy a house if you owe, as long as you are currently on a payment plan. Here’s a cheeky little trade secret for you – that’s how I managed to buy my first home. There are ways, y’all, you just gotta know how to find them, and you gotta plan ahead for them.
“The best way to know if you have viable income is to have a lender review your tax returns and assess where income can be bolstered up and used to qualify for a home loan. This is ESPECIALLY critical BEFORE YOU FILE your tax returns to the IRS in a new year! This way, the tax return can be modified and adjusted before the IRS gets it. It may require you pay more in taxes, but it can also mean homeownership.”
Got questions? Reach out and I’ll talk you through it, and if it’s beyond my expertise as a real estate agent I’ll happily refer you to one of my Portland, OR home loan nerds who can tell you all about getting a mortgage while self-employed.
Please note: This blog has been updated to reflect current circumstances.