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Buying a Home While Building Your Business

August 31, 2018

Have you joined the gig-economy for additional income, or taken the plunge into starting your own business full-time? Self-employment offers many benefits: mastery of your schedule, working in your pajamas if you want, and the opportunity to directly impact your own income.
 
When you decide it’s time for a new home for your home office, documenting income from your independent business will mean you’ll have a little extra responsibility when applying for a mortgage. What can you expect when you go through the home loan process?  
 
While there are some variables depending on the structure of your business, your lender will generally request the most recent two years of tax history. This is true even if you are in the same line of work as you were before you went out on your own. If you have been in business for less than five years, the lender will look at a two-year average. Sometimes, the most recent year of income may be down (despite your best efforts). If this is the case, your mortgage expert will need to take into account the lower amount of either the two-year average or last year’s income. They may request additional documents such as business assets, debts, and profit & loss statements.
 
If you have been in business for a long time, there is a little more flexibility. For example, only the most recent  year of tax returns versus two years may be requested. 
 
What if you just started your business and found the perfect house?  Well, this is when outside-the-box options can be considered. A co-signer may be one solution. If you are married and your spouse can qualify for a mortgage on their own, it may be possible to leave you off the loan.
 
It’s important to know that a lender will look at the net income on which you paid taxes, rather than overall gross income. Maximizing deductible expenses may be helpful from a tax liability perspective, but can negatively impact your debt-to-income ratio.  This could mean you qualify for a smaller loan that you had hoped. One caveat: while it’s best to keep personal and business finances separate, if business liabilities show up on your credit report, they may be excluded from your personal debts if the business has been paying those expenses for at least twelve months. This can help increase your buying power. 
 
Some aspects of the loan process if you are self-employed are exactly the same as if you are a traditional W-2 wage earner. Credit history and scores are still important. Your overall debt to income ratio will be considered. Having positives in each of these areas, along with saving for a healthy down payment can help you qualify for the maximum mortgage amount within your means.
 
As always, we have experienced mortgage experts who can help answer questions. Each one understands that every borrower is as unique as their dream home!
 
First Security Bank is a Division of Glacier Bank
Member FDIC / Equal Housing Lender
 

Posted in: business, home, loans