There are currently approximately 16 million self-employed workers in the United States—and as the gig economy continues to grow, the number of self-employed individuals only stands to increase. Even though working for yourself is becoming more common, it still presents specific challenges when obtaining a mortgage—and if you want to buy a home successfully, you need to know what mistakes to avoid.
There are three crucial mistakes self-employed individuals need to avoid when obtaining a mortgage, including:
- Erratic income. As a self-employed person, you’re required to submit at least two years of federal tax returns. Your tax returns prove to your lender that your business provides the stability necessary to pay your mortgage each month—which is why having a steady income is so important. Minor fluctuations are acceptable—but to show your lender you’re a qualified candidate for a mortgage, you should be able to prove your business pulls in stable or steadily increasing income.
- You are carrying business purchases on your personal credit cards. There are costs associated with running a business. If you pay for those costs on your personal credit cards—and carry the associated debt—it can impact your debt-to-credit ratio, making it harder to secure a mortgage. Having high credit card balances can also negatively impact your credit score, which will further hurt your buying power or make you unfinanceable.
- Not having proper documentation. There’s a lot of paperwork that is required to secure a mortgage—but there’s even more when you’re self-employed. In addition to your tax returns, you may also need to provide a profit-and-loss statement, as well as additional financial documentation for your business. Before you apply for a mortgage, make sure you have all of your financial paperwork—business and personal—ready to hand over to your lender.
As a self-employed individual, you can secure a mortgage and buy the house of your dreams—it’s just important to understand any potential roadblocks you might face (and mistakes you need to avoid) to help make it as easy and straightforward as possible.