Disclaimer: This post is based off my own personal experience to help you think through some of the important pieces of buying a home. Definitely consult a team of professionals if you’re planning on buying soon!
I don’t have to tell you twice that starting a business is a series of unexpected twists and turns and you feel like you’re shooting in the dark half the time. That’s why Anna and I try to be so open and share everything we learn along the way. So why would it be any different when it comes to areas of our personal lives that are directly affected by our business?
I recently bought my first home over a 2 month period. No joke… I decided to actually buy in the beginning of July, put in an offer in August and closed the first week of September! So I had to learn ALL the things in a short amount of time and now I’m here to share that with you!
This is obviously the biggest part of buying a house as a self-employed individual and was definitely the scariest part for me personally (I’m also single so extra EEEKKK!)
The first thing I did was look on Zillow to see what I could get in my area for different budgets. (Full disclosure: I’m in North Carolina where real estate is much less than other areas of the country making this much more attainable for me) I used the built-in mortgage calculator to get an idea what my monthly payments would be with different down payments and price points. Based off this information and my own personal budget, I narrowed in on the price point I was comfortable at.
One thing most people don’t talk about in the home buying journey is how much closing costs are and I had no idea how to even figure that out. I knew I needed a down payment (ask your lender if you qualify for any down payment assistance programs! I was a first time homebuyer so I was able to put a lot less down! But don’t forget you’ll have PMI (private mortgage insurance) if you put less than 20% down) but I didn’t know what everything else cost. Luckily I had some friends that already own so I asked them what to expect. One told me to expect closing costs to be about the same as your down payment which actually ended up being pretty accurate in my case!
You can actually get a cash-to-close estimate from the lenders you reach out to during the pre-approval process which is extremely helpful and much more accurate than assuming it’s the same as your down payment. You want to make sure you know this ahead of time because if you don’t have enough cash to close then deal won’t go through and you’ll be wasting your time and potentially money… which nobody wants!
Not all lenders are created equal! I read somewhere that majority of homebuyers only contact one lender but you’d be surprised by how much they differ… especially if you’re self-employed!
The biggest difference when buying a house as a self-employed person is when lenders calculate how much you can be approved for it is based off your net income, not your gross. They average the last 2 years of business (so if you haven’t been in biz for 2 years this could get tricky!) to find your qualifying monthly income. They can add some of those expenses back in to boost your income a bit but if you take a lot of write-offs this could be a little tricky for you. I read that if you’re planning on buying as a self-employed person, you should take less write-offs for the 2 years leading up to buying (I know, let’s all roll our eyes collectively at how ass-backwards that is). Luckily I don’t take a ton a write-offs so I was fine which could also be the case for you as well!
If your most recent year was amazing but the previous wasn’t as great, you might want to ask the lenders if they can just use the most recent tax return. I actually had a lender say she could just use my 2018 income without averaging it with 2017 (which would have dropped my qualifying monthly income). There are definitely options and some lenders can accommodate you better than others!
Here are the documents I provided to the lenders and you’ll likely need to provide to your lenders as well:
Last 2 years of tax returns (personal and business if you’re a partnership or LLC like Anna and I) including your K1s as well
Last 2 months of bank statements
Year-to-Date Profit & Loss statement (this is not included in calculating your qualifying income… it’s just to make sure you’re not making less in the current year)
You may need to provide more but these are the main documents my lenders asked for. You’ll also likely have to write a letter of explanation for large deposits and withdrawals to your bank account and any other pieces of information they need an additional explanation for. Basically keep documentation of all large transactions because they will ask to see that paper trail and that includes paying yourself!
Now how to compare lenders and make sure you’re finding the right one for you! I actually Googled and complied a list of questions to ask the lenders I reached out to. This not only helped me compare them but it also helped me learn more about the process. These included (in no particular order):
Do you have experience working with self-employed individuals?
Which type of mortgage is best for me?
How much down payment will I need?
Do I qualify for any special mortgages or down payment programs?
What is my interest rate? (ballpark)
What is the annual percentage rate? (ask to explain the difference)
Are you doing a hard credit check on me today?
Do you charge for an interest rate lock?
What will my monthly payment be?
Is there a prepayment penalty?
Do you have an origination fee? What other lender fees are there?
What are my closing costs?
How long does closing typically take? What could cause a delay?
What documents do I need to get pre approved as self-employed?
Is there any way to get the monthly payment lower?
Will escrow be included in my payment?
What services can you provide beyond my mortgage?
Do you sell your mortgages? If yes, do you still service them?
My decision actually came down to 3 factors: Interest rate, cash to close estimates, and their communication with me/how easy they were to work with. (Note: Some lenders actually have no lender fees meaning lower cash to close. That’s something to consider if you have less cash to put into a home!)
If you contact a lender and they tell you that you can’t get approved for what you want, definitely contact another! I had one lender tell me I could get more money than I said I wanted (this is why it was important for me personally to decide on the price point I was comfortable at.. the higher end of my range would have been doable but stressful during potentially slower months) and then another tell me I could only get approved for $40k less than what I asked for. If the one that wanted to give me less was the first person I contacted, I probably would have stopped my search right then and there thinking it wasn’t attainable at the moment.
Other Things to Consider
Once your offer is accepted you’re going to have a TON of information thrown at you especially when it comes to financing. Keep this in mind when you start this process. There were several times where I said, “buying a house is a full-time job”. I was either running out during the day to look at a house or reading contracts midday after my offer was accepted. Luckily I had Anna to hold down the fort but this might be something you want to consider if you’re a solopreneur!
As I mentioned before, my decision came down to the interest rate in part. The lender I went with actually already had a great rate compared to the others but you can also buy what they call points to get a lower rate too. For example, I could have lowered my rate .125% for $265 or .25% for $1127. This really depends on your goals for the home in the long term and your current financial situation.
Another thing to be mindful of is they’re going to need a lot of paperwork from you, especially as a business owner. One thing I found odd is I provided my tax returns to them but they also needed the tax transcripts directly from the IRS. Your lender will just have you sign a form allowing them to request the transcripts on your behalf but make sure they get both your personal and business transcripts. Mine didn’t have my business (and I didn’t realize they needed them) and 2 days before my closing I was scrambling trying to get these for them.
Which brings me to… yes, they should have known that and yes, I had a meltdown days before closing. And all for nothing. They actually could close without them and while I was having a nervous breakdown everyone else was all “ohh this always happens”. So listen to me when I say… it will happen and it will all work out. Everyone involved wants the closing to stay on schedule. I know this won’t make it any less stressful in the moment but just try to remember that!
These are my biggest takeaways when it came to buying a house but if you have any questions, please leave a comment and I’ll do my best to give you information on my personal experience! Happy house hunting!