Buying a home as a self-employed professional can be a bit of a tricky combination for some.
Let me start with a lil story: I was recently chatting with a dear friend here in Portland when she casually mentioned that she was on the verge of quitting her job and starting up an amazing small business… and then she wanted to buy a house in Portland a month or two after that.
I admittedly 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 – years. 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! To be honest, working for myself has been 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 it is absolutely doable!
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 self-employed person a home loan without you having paid your taxes.
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 at my friend when she was going to quit her job 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 money, you still don’t have the two years of self-employed tax history that lenders insist on.
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! See what Jen Leon, one of my preferred lenders here in Portland, has to say on this:
“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 damned time you get paid for a job or by a client, set aside a percentage that you and your tax person have agreed on so when tax time comes around, you’re prepared!
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 lil secret: that is how I bought my first house!
“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.”
Do’s + Don’ts:
1. Hold off on any major purchases, like that new sofa, or trip to Costa Rica. Those can wait.
2. Talk with your lender and/or tax person/accountant BEFORE filing taxes for the year.
3. Advice from seasoned professionals is usually FREE. Don’t be afraid to check in with everyone for the best course of action.
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.