Growing up, we’ve heard of the American dream. While many people’s dreams may vary when it comes to career, family, etc., the one constant thing on everyone’s wish list is a dream home.
In the past, buying a dream home required substantial income, which traditionally meant working full time. However, the idea of “work” has changed for many people in recent years and continues to do so. Over the years, more and more people have started to work for themselves through the freelancing economy where anyone can engage in odd jobs or even start their businesses. As a result, they don’t always enjoy a steady income or have the more traditional benefits of being a full-time employee. This doesn’t mean that self-employed people have to lose the dream of owning a home—they just have to go through the process a little differently.
If you’re self-employed and are planning to purchase your first home, make sure to prepare the following:
Proof of Income
Mortgage lenders usually ask for a 3-month pay slip from full-time employees whenever they apply for a mortgage. As self-employed applicants, we might be asked to present the last six months to a year’s worth of income. Don’t be surprised when that happens.
This is a way for mortgage lenders to make sure that no matter how erratic your income is, you would still have the capacity to pay your mortgage obligations even when you’re receiving your minimum income. By asking for proof of income for a longer time frame, lenders are trying to justify your income stability, the financial strength of your business, or the ability of your business to generate income in the future.
Some prospective homebuyers who may not be employed as a full-time employee, but on a contractual basis, might be asked to present proof of employment or work contract.
In addition to providing evidence of stable income, a lender is also likely to request documentation (emails or letters) from existing customers used to determine the likelihood that they will continue to earn more income. Other important documentation may include obtaining government or other business licenses, Doing Business As (DBA) documents, evidence of insurance for your business, or a record from an approved certified personal accountant (CPA).
Mortgage lenders will also need to check full tax returns to better understand the self-employed applicant’s actual income. This might mean that you must present two years of non-public and business tax returns (including profit and loss form). Also, if somebody has been self-employed for fewer than two years, usually they have to present proof of having worked a minimum of twelve consecutive months. This is part of a self-employed professional’s requirement to qualify for a mortgage.
Lastly, you also have to keep preparing your credit score and have an idea about your debt-to-income ratio. Needless to say, you have to work hard to improve your score while lowering the ratio to a minimum. This means that you have to be smart about your finances and veer away from bad debt.
I hope you learned a thing or two from this article. To know more about your lending options, feel free to contact us at TLC Lender, and we’d be more than happy to assist.
Things to Consider Before Making an Offer
Buying a property is a fun yet daunting experience. You would expect that you’ll get used to the “stress” as you gain a lot of experience buying one, but it just evolves. All the complex processes involved can create some anxiety, especially when it comes to making an offer on your absolute dream home. To make the process simpler, we’ve created a list of things that might help you be prepared and more confident when it comes time to submit your offer.
Get Pre-approved for Your Mortgage
Pre-approval is the method by which a lender determines if you’re approved for a mortgage before even formally applying for one. This acknowledgment signals to the sellers that you’re a capable buyer, and in turn, they will feel at ease and be more considerate about your offer. Pre-approval will also help you work with an established budget, making it easier to search out your dream while working on a value you’ll be able to afford.
Don’t Forget About Closing Costs
One thing that you should not forget before making an offer is to seriously consider closing costs. These costs could potentially put you over your budget and dampen the excitement of finding your dream home. Closing costs typically range from 2-5% of the purchase price, so be sure to include this number when calculating whether or not you can afford a home.
Review—You Might Have Overlooked Something
The moment leading to you making an offer is a crucial one, and it might be prudent to take this time to review every little detail that might affect your offer price. For example, not all costs of homeownership are included in your mortgage payment. In addition, there are still home insurance, utility bills, and other miscellaneous costs to consider. Before making an offer, you should consider asking to see the water and other utility bills from the past year and factor those into your budget.
Observe the Neighborhood
When buying your property, you’re also buying a piece of the neighborhood around you so take a closer look at what the community has to offer. In addition, if you are buying with the hopes of the same property increasing in value over time, the neighborhood plays a huge part in affecting its value.
Be Fair, Avoid Low-balling
You seldom find a house that’s already in perfect shape. Some houses need a little TLC to bring it to the ideal habitable state that we prefer, and while you can consider that to make a lower offer, that doesn’t mean that you can low-ball your way through and force the seller to agree. In cases like this, you just might end up scaring the seller away. So, that’s one thing to think about before making your offer.
The list above is not, by all means, exclusive, but it should get you off to a good start. If you’re ready to take your next step, contact us today and let us help get you started!