One of the number one ways a mortgage lender determines if they want to give you a home loan or not is by analyzing your W-2, but what if you are self-employed and only have a 1099?
Each year, more people are becoming self-employed, which means more people are looking to purchase a home using a 1099 instead of a W-2 to provide to potential lenders. But don’t worry, it is still possible to buy a home, the process of securing a loan will just require a lot more paperwork.
Lenders will want to see adequate proof of income from you to make up for the missing W-2. They will closely review your income as well as several other areas such as credit score, debt-to-income ratio, work history, and assets. A good lender will be able to assist you through the process, from gathering the documentation you need to finding programs you may qualify for.
If you are self-employed and are looking to buy a home soon, there are a few things you can start doing now to help you later on down the line.
One of the number one things you should do is keep accurate records of your income. For example, if you are working as an independent contractor, you should keep documentation like receipts from your clients, all your tax forms, bank statements, and at least 2 years of work history.
It’s also a good idea to employ a CPA to assist you with your taxes. This will not only keep them properly documented, but it will also lend credibility to your taxes versus when you use an online tax service to file them yourself.
Your tax forms will be one of the major areas scrutinized by lenders. Most lenders will be looking for proof of qualifying income levels for at least two years. For those who submit work-related expenses as deductions on their taxes, remember that this will cause your income to appear lower to lenders. If your work-related deductions for the last year are high because of a large, one-time purchase for the business, you should keep documentation about the investment to present with your tax forms.
Your credit score will also play a part in the loan decision, so working to raise your score now will significantly benefit you. Without a W-2, your credit score will play a larger role in determining your eligibility in the eyes of lenders. Lowering the amount of debt you have will also help. Lenders like to look at your debt-to-income ratio, which you can also affect positively by putting more money into your savings. And, of course, being able to put down a sizable payment upfront will definitely give you a good boost.
And, of course, working with an experienced real estate team will help you immensely on this home-buying journey! Ellen has helped numerous people who are business owners or independent contractors find homes, as well as expert lenders who can help them find a mortgage solution that fits their situation.
