Applying For A Mortgage While Self Employed
If you are self employed – whether a visual artist, guitar player, music producer, independent contractor of any kind – I can hear you now, “There’s no way I’m buying a house in this market, or probably ever.” Well, having been in your shoes, literally all the boots aforementioned, I can say that’s just not true. This is not a class, although maybe I should do one, this is just one one-off video… But if you do these 3 things – just 3 these three things – you can purchase a home.
If you’ve never been to my channel before, my name is Joshua Smith. I do videos like this pretty often where I just throw some advice on the wall for whoever to see. If you could like the video it would help me out, and if you want to subscribe I’m sure you’ll find more content like this, worth your while.
Now let’s talk – real talk. I am a creative. I don’t just make super good looking videos, I am a visual artist, a self-published author and an illustrator. I had a short stint as an actor and model, but through all that I’ve played music with some of my heroes, maybe yours too and I still write and record and produce music… but in the past as a result of all of that I’ve held every job you can imagine from a gas station attendant to a construction subcontractor, many independent contracting roles, on up to a C level executive, business consultant – and now – investor, company owner, real estate agent, that’s enough proof (I hope) to show you that I’ve been there. I know the good, the bad and everything in between. Through all that though, even when I started making 6 figures a year, I was tracking expenses to make sure that my tax obligation was as low as it could be. I never didn’t pay taxes, but I see you too. Any of this sound familiar?
Everyone is in a slightly different situation, but this will work for anyone if you are diligent and can make sense of it for your life because it’s based strictly on what a lender is going to be looking at: your debt to income ratio, or “DTI”, and your credit score. You also may need a down payment, but this is situational….
Step 1 relates to your income, and it involves getting your taxes in order. I know this seems a little backwards, but your tax return is where a traditional lender is going to qualify your income. A mortgage lender is not looking at what you make on your bank statement, although it helps if you can show cash flow in a business or personal account if your credit debt is high, they need to know what you bring home after your expenses, and they look at your tax return for that information. What this means is, you may have to report more income, and less expenses, which will require a little more to uncle Sam. So your situation will dictate what this looks like, but a lender can help navigate those income needs based on your existing credit debt and credit worthiness. SO, here’s what you do… First, get in touch with a lender – don’t have one, I’ll get you one based on your location and needs… then, find out how much you have to show in order to qualify. It may not be a big shift, but it has to be consistent. The key is you need to show 2 years of income at a consistent or growing rate. You can go back and re-file previous years tax returns with the IRS, but if you need more time, just start today and budget according to the plan that you and your lender set to reach that income goal.
Step 2 relates to building your credit. If you have a perfect score than skip ahead, you know all this. If you have mountains of credit debt, this could take longer than 2 years for you but the process is the same as if you have no credit debt at all. The goal here is to build a healthy relationship with credit. Most of us weren’t taught how this works, but basically all you have to do is utilize a debt and pay it off every month. A low limit credit card is the most straightforward method, basically get a $500 limit card with CapitalOne or whoever, and use it for groceries and personal stuff that you know you can afford because the money is already in your bank account, even if that’s after your paycheck. I put all my subscriptions on credit, because it helps me keep track of my subscriptions, but also those payments generally don’t change, and then I set an auto draft up to leave my bank account every month. It’s plug and play, just watch your credit score grow. I know people that have built up their score some with a new car payment, again, every situation is different. Just keep your credit utilization below 40% month over month if you can, 20% is even better. That means if you have a $500 credit card, let no more than $100-200 sit on that card month to month. Now if you do have existing credit debt, this is where the balance comes in and we have to talk about income again, but do I think this is possible for anyone with just 2 years’ time if you are consistent to be able to qualify for a mortgage and buy a house.
Step 3 is just balance and consistency. The secret is that people build their credit with cash. Make money, pay down some debt. Every time you make a larger than normal payment to a debt, it raises your credit score. So if you have debt already, that could really help you build your score up. You might have to get a second job, or take on some extra work, but the higher your score, the better your interest rate will be on your mortgage. The better the rate, the lower the payment. Your debt to income ratio is just that, it puts the debt you pay monthly next to the amount of money you make per month (so your tax return income divided by 12), and those two numbers give them a percentage. For most banks right now, they are looking for no more than a 40% debt to income ratio. That varies by lender, which I’m not, so going back to step 1, you really need to speak with a lender. But this information is paramount to getting qualified for a mortgage to buy your first house. You need good credit, you need good payment history, you need qualifiable income that is greater than 60% of what you pay toward your credit debt per month, and you need to show this income consistently for the previous 2 years to putting in that mortgage application. So if you take on a second job, keep it through the purchase of the home, the bank will probably need that income for your application.
Down payments will help you keep your payment down and it’ll help you qualify for a larger amount. But, different states and banks have programs for first time home buyers that are based on income and home use. I’m in Tennessee and Alabama, and both states have options. So if you’re buying a primary residence, and you make under $100k a year, you may not need to come up with a down payment at all. If you make more, or this is a second purchase, or if you don’t intend to live there as a primary residence there will be a down payment obligation for sure, but every situation is different.
Now, that you have your 3 super secret, hot tips to getting qualified for that mortgage and getting your first house, you probably have more questions. Well most of those will have to wait for another day. Hit me up with questions, let’s get you in touch with a lender and apply for a mortgage when the time is right. You might be closer than you think. Talk soon.