Buying a home is a daunting process for everyone. With so much fine print to read through, options to consider and decisions to make, it’s not surprising we often hire somebody to help us with the process. If you’re self-employed, you could possibly face even more challenges with loans, deductions and more. There are numerous approaches to side step those challenges, and some of the most commonly heard issues aren’t even true. So don’t fret at this time, utilize these tips to make the process of purchasing a home as a self-employed person easier and much less stressful.
Suggestions for Buying A Home When You’re Self-Employed
1. Don’t Fall for the FHA Loan Myth
One of the biggest misconceptions around FHA Loans is that self-employed people are not eligible for them. This is simply not true. While your small business could take some time to get off the ground and become profitable, as soon as they become established and start providing a steady flow of revenue, they’re treated the same as any other type of revenue.
Poor record keeping, though, makes it challenging for a self-employed person to be approved for FHA loans. The important thing thing to remember is the fact that even if you know your business is profitable, your records must clearly show it. That’s why it’s imperative that you keep meticulously thorough records and plan well in advance-as early as two years before you purchase the home.
2. Reconsider Your Deductions
Business expenses and tax deductions make most freelancers and self-employers giddy with delight around tax season. However, in addition, they bring some drawbacks. Having a great number of business expenses cuts down the income that is reported on tax returns, as these documents show income after expenses. It’s recommended that you plan accordingly, and try to minimize business expenses in the year or two prior to buying a home.
Bankrate notes that some lenders understand this predicament of self-employment, and might allow you to add a few of your deductions back in. Be sure to check with potential lenders to find out if this will be an option well in advance.
3. Separate Personal and business Finances
If you’re not doing this already, it’s vital to keep your personal and business expenses segregated. In case of an IRS audit, you’ll be required to differentiate between personal and business expenses. If this should ever occur, you’ll have a much easier time sorting through finances that were separated from the get-go.
Use whatever kind of record keeping or accounting system you’d like, just be certain there’s a definite line between your money and your business’ money. Use free printable tax organizers to make sure you’re tracking the correct financial data, both personally and for your business.
4. Look for Lending Alternatives
There’s more than one way to buy a home. Do a lot of research on all your options, and be sure to take into consideration the ones that may not be typically used. Sometimes these options are so (relatively) simple that you may not actually consider them, like borrowing from a family member, or borrowing from your IRA or 401(k), as an example.
The home loan market is slowly starting to catch up with the rise in self-employment, offering alternative loans that may be great for individuals who work for themselves. For example, some specialty banks offer “alternative income verification loans.” This type of loan examines overall cash flow rather than taxable income, which can be advantageous for small business owners.
However, these as well as other alternative loans often come at the cost of high fees and down payments.
5. Plan Carefully Around Taxes
One of the least-pleasant side effects of the freelance life is the daunting, overwhelming prospect of filing and paying taxes. Because you’re both employer and employee, you have to pay both the employer and employee shares of Social Security/Medicaid taxes. Furthermore, taxes aren’t regularly deducted out of your paycheck; they should be paid quarterly. Therefore, it’s entirely possible that unexpected payments and expenses to creep up on the self-employed.
Be sure to keep careful on top of your taxable income, deductions and quarterly estimated tax payments. The quarterly due dates are April, June, September and January 15th, so if you’re making a down payment around those times, be sure to take into account the additional expense.
6. Have a Plan b
It’s never a bad idea to have an emergency fund in the bank. When you’re self-employed, though, it’s almost necessary. A sizeable cache of savings will allow you to make payments if your business takes a turn for the worse, and may show potential lenders that you’re an accountable borrower. Plus, it could assist you in making an even bigger down payment.
Purchasing a house when you’re self employed isn’t impossible-it may be accomplished if you plan ahead, know the best places to look for lending and file the right paperwork at the right time. Begin using these tips and consult with a financial advisor to make your house-buying process as exciting as it should be.