The so-called “gig” economy means more people than ever are self-employed, receiving 1099 tax forms as independent contractors. In the world of the self-employed, the idea of securing a mortgage can seem like a fantasy. Unlike the traditionally employed, the self-employed entrepreneur is seen as a greater risk. Despite making a good living, some self-employed workers in the North Metro Denver area never even apply for a mortgage, believing the dream of home ownership is cut off by slim chances for approval.
This isn’t necessarily true! Don’t give up on home ownership in Denver just because you’re self-employed. Instead, take the steps to boost your status in the eyes of lenders. Here are some tips to put you on the path towards pre-approval:
1. Lower your debt. Debt is what haunts almost all new buyers seeking a loan. If you’re self-employed and debt-free, or have a low income-to-debt ratio, you look much more appealing to lenders. But BEFORE you start paying off credit cards contact our preferred lender to find out which debts should be paid off first.
2. Keep your personal and business accounts separate. Professionals draw a line between business income and expenses and personal income and expenses. Demonstrating this level of maturity is a plus.
3. Deduct less on your taxes. The self-employed are almost always guilty of taking tax deductions which cast a little shade on their mortgage application. Take honest, documented deductions, and don’t make it look like you’re desperate to cook the books!
4. Register and pay yourself like a pro. Make sure your business is licensed and registered and, if possible, setup your business structure to pay you on a W-2 form rather than declaring your income as 100% 1099.
5. Document everything. Make no claim without paper (or verifiable digital records) to back it up. Check stubs from clients, proof of income, expenses… everything. The more thorough and organized your documentation, the better you look to the lender reviewing your file.
It can also be useful to make a larger down payment than most, but lenders understand this can be difficult. You may be eligible to use your IRA or even an old 401(k) to boost your down payment, but talk to your tax professional before you make any moves.
Don’t let self-employment cloud your view of securing that mortgage. It is possible! I’d be happy to put you in touch with lenders when the time comes.