My wife and I are looking to purchase a home. Ideally, with an $8000 tax credit for first-time home buyers (which for now expires on December 1st), our lease on our apartment ending in December, and a baby due in January, we're hoping to have a decent starter home in San Diego by the end of this year. I get pretty giddy when I think about it.
Unfortunately, from what I understand so far, being self-employed makes it a little more difficult.
What I quickly learned while trying to get pre-approved for a loan is that if you're self-employed, most loan officers and banks will not even speak with you if you have not been self-employed for at least 2 years. 2 years! Of course, it wasn't always this way, and there were programs to help the self-employed with getting a loan much easier before, but since the economy has been the way it is, those programs have since halted.
So what am I going to do? Well, there are apparently ways around this (legal ways), but it's going to take a little more time and effort. I've been referred to a few loan specialists who say that I'm not totally SOL, because we do have a few things in our favor:
- Superb credit scores and credit history.
- Excellent income coming from my business.
- We're going to put 15-20% down on the purchase price.
- My business accounts (quickbook accounts), are up to date.
It's hard to believe that even though I currently earn over $20k a month, I can't get approved for a loan that would leave me with an estimated monthly payment of about $1300.00. That's how wary everyone is about handing out loans now, because that's kind of what got us in trouble in the first place. So really – I don't blame them for being more careful. That's a good sign…I guess.
I'll definitely keep you updated on our progress. I hope that by the end of this process, you'll understand how someone who has been self-employed for less than 2 years can score a mortgage loan.
(Crosses fingers)
Have a good weekend!
Man I obtained a mortgage pre approval two years ago with %20 down and earning just over 2grand a month here in Canada.
I have a relative that tried to purchase a home with Florida and had a disaster of a time. From what I remember it really helps if your spouse can prove their income on top of your down payment & business income.
Have you considered increasing your down payment?
I got a home loan as a self-employed person, but it took a little wrangling. I’d been self-employed for four years and the banker still told me that anyone self-employed was a risk. I finally called his office and left a message telling him that this isn’t the 50’s- everyone is self-employed now and if they wouldn’t lend to someone who was then they’d be losing out on most of the business available. I said that I’d be getting the loan and the proceeds could either go to his bank or to someone else’s. The next day he called me back and accepted me. My parents maintain that it wasn’t my call that did it, but all I know is that one day they said no and the next day they said yes. Of course, that was a couple of years ago before all of this mess.
There are a couple of options that might be fairly fast to implement. Form an S Corp(Or an LLC taxed as an S Corp) to manage your current business and pay yourself a salary from it. Issue a couple of paychecks and suddenly you are back in the world of being employed.
You can also do it with a C corp but they tend to involve more paperwork.
Both options would also improve your protection in your business and give you some new options for saving for retirement. It might take a while to transfer all the earnings over into the business name though.
It would also give you the side benefit of lowering your chances of being audited too 🙂
Good luck with it.
I am the owner of a c corp the company i s new (under 2 years) and I want to purchase a home but was told that there was no way unless I was employed and only needed one check as opposed to the 6/12 that I heard you needed. Suggestions?
Scott is right — my accountant told me the same thing — but you need 3 years of past pay stubs to get approved. I re-filed all my ’05 ’06 ’07 ’08 taxes to take advantage of this.
On another note, I think you would be absolutely insane to buy a house in San Diego right now. Houses are depreciating at a decent clip, and to make matters worse there’s no inventory on the very low end. You’d be more successful if you waited until the $8K tax credit expired.
Besides, don’t you make way more than $75K/year? You don’t qualify for the $8K if that’s the case.
I write a lot about real estate, and (of course) have been heavily researching the San Diego area, and it makes for more sense to rent than to buy. Wait until you have 100% down; then you won’t have to deal with the mortgage companies. 🙂 (And in the meantime, interest is working in your favor instead of against you — and housing won’t appreciate for years anyway.)
-Erica
Oh, forgot to mention: http://www.bubbleinfo.com/ is your site for N. County real estate tracking. Jim’s awesome, too. He’s worth going up to O-Side to meet (I did).
I like http://piggington.com/ for San Diego real estate info, too.
-Erica
Pat– good luck in this process.
BTW, from the discussion I had with a mortgage guy two weeks ago– you want to start very early and leave no stone unturned as a source for your mortgage.
Sorry, realized that my earlier comment should say $150K since you’re likely married filing jointly. Can you install WP Ajax Edit Comments pls? 🙂
Erica – Not sure how the process works now but when I bought my house two years ago, they requested two years of tax returns and the last two pay stubs. Two years of tax returns shows your history of earnings and the last two pay stubs show you are currently employed. I am sure different lenders have different requirements so be sure to ask what qualifying paperwork they need. In the tighter credit market we are in they may require more.
I have to say that now would be a great time to start looking for a home but not sure I would let the credit be the deciding factor. They are also talking about extending it and increasing it. Of course depending on Congress to do anything is a veritable crap shoot.
Buying a house is a major step in any environment so make sure you buy well 🙂
Hi! We’ve exchanged some eHow mail this week.
This EXACT thing was our problem over the past couple of years. I have some warnings and you’re free to email me if you like for more info.
There are a lot of details but I’ll keep it really as short as I can. We found a home we liked and got pre-approved. BE CAREFUL OF THAT! That paper is worthless. We went through with all the paperwork and were told we were approved by our bank (only much later we understood that an approval is also a pre-approval, and nearly as worthless. You must go through underwriting and get approved by them in order to absolutely know that you are getting the home). We were told one week before moving that underwriting did not approve us. We had plenty of income, but because we were contractors (both) and even though my husband was with his company for years, they still didn’t approve. Owners got p’od and sued us. We’re still going through that two years later. We did nothing wrong. We tried everything we could to get that loan. We were told we could possibly get a slider loan – good for those who are contractors – they don’t have all the requirements but your interest rate is much higher (it’s an ugly option).
So we hung out in an apartment for another year, and I saved a bigger downpayment. Definitely helped. We both had good credit (didn’t help us that first time around.) But the second time we were able to get the home – it was a foreclosure in really good condition. I think that also helped that we wanted this house.
Additionally – the bank that came up with the loan for us and helped us most was our very own bank – Chevy Chase Bank. We didn’t try them the first year, and went with PNC, who screwed us over big time. But Chevy Chase was great to us and part of what helped was that we’d been banking with them for some time. So I would suggest not to turn your back on your bank and try going to them to get the loan. They know your income – your history, even though you’re not working for someone else. (what the heck is the REAL difference anyway!!!??)
Anyway good luck and I’m sure you’ll be fine with that much income as well as a 20% downpayment. Just don’t bite off more house than you can chew. Keep your sites more modest – you’re still young and can buy a banger of a house later if you want. Keeping the price of the house far under what you can afford will really help you get into a home more easily.
@Gankaku on Twitter
I love our government. A person making $20k a month gets paid $8,000 to buy a house from people making 10% of that figure. Brilliant. I can’t wait to see what else Obama has in store.
If his actual profit is $20k per month then he would not qualify for the credit due to the income limitation kicking in at 150k for a married couple.
Now if his revenue was 20k/month and his expenses put him under the income threshold he could qualify. Just remember revenue is not profit. 🙂
And the first time home buyers credit was a bipartisan bill, so even though I am in complete opposition to Pres Obama and his economic plans, we can’t lay this one completely on his doorstep.
I don’t know the US scene but Australia also has a subsidy for first home buyers which is about to be decreased. All its done is pushed the first home prices up by – about $14k – exactly the same as the subsidy! On the other hand if you start negotiating the day the subsidy stops – I bet you will get more than $8k off the asking price 🙂
Pat,
Just wait for 8-9 months, save all the passive income you generate and buy the house for cash.
Pat, you’re grossing over $20k a month and you’re only planning on putting 15-20% down?!!???!
What would it take to just pay cash for the whole thing and be done with it? You’d save a lot more than $8000.
Good luck! We had to get approved for a home loan being self-employed for only a few weeks…it helped to go through a bank in a small town where we knew the loan officers! I’m sure it also helped that we did it before the foreclosures really started flooding in and banks started getting nervous.
Why do people think that having a completely paid off house is a great thing? At some point in your life, sure it makes sense. When you get ready to stop working or reduce your earnings significantly. Otherwise it makes far more sense to leverage your money and keep the balance invested in your business or private loans or bonds. Right now I would avoid the stock market overall. A paid off house is simply a very illiquid place to keep your wealth. The combination of the tax deduction for interest paid, relatively low interest rates, and the illiquid nature of it means it makes far more sense to keep your money available and working for you. Not sitting stagnant in a house.
Well, for one thing, paying cash for a house means you don’t need to go through the hassle of getting a mortgage while self employed.
For another, there are a lot of people who got the tax deduction and “low” interest rates and had their nice and liquid money working for them elsewhere… and many of them are in foreclosure now…
Yes a lot of people overextended themselves buying their homes. They didn’t have an emergency fund, a well diversified set of liquid investments, good rules in place to take money out of the market when needed.. still doesn’t mean it is sound financial advice.
True paying cash means you don’t have to qualify for a mortgage. Though as discussed above there are other ways to get around the mortgage issue.
A mortgage is not evil though some people want to treat it that way. Managing your money and your finances can involve a mortgage in a carefully thought out plan but like any plan you have to be aware of the risks.
I hear you, Pat!
I went through the exact same thing just a few weeks ago. I still have a full time job (fortunately or unfortunately depending on how you look at it) that doesn’t make enough to get a mortgage. I’ve only been with my business of selling books on the Internet for about a year so I was told we’re SOL as well. Unfortunately, we also don’t have a down payment set aside so we axed that idea. We’re going to have to save some for a down payment, wait another year until my business has been around that long and then look into it.
It’s a ton harder than when we first got our house!
I can’t believe you can’t get qualified for mortgage! That is just ridiculous. I know that banks are being cautious because self-employed income is usually variable, but if you have proof that you’ve been making around the same income for several months/years, I don’t really see what the problem is.
Good luck Pat!
To get your mortgage in the first place you ned to have an agreement with the seller, and be able to coonvince the bank you really want it and can afford to pay it back
everyone wants to do this these days, it can be quite hard
The whole lending system is corrupt. You just want to get a house and stay within your means and you definatley make enough but these other guys who bought too much house for their income now qualify to get help from the government for mortgage modifications. That just disgusts me. I really hope that you can get everything through before December. We also moved in one week before our daughter was born and it was not easy.
Maybe you can find a foreclosure and pay for it in cash as another reader stated above. There are probably plenty in San Diego. Good luck.
This is a good post and highlights the fact that there is a bias against self-employed people in this country. I just found out that I am not eligible for a car loan because I take enough write-offs to show only $15k in income per year! It looks like I live at the poverty line because if I don’t take the write-offs, I will be paying much more in taxes. Banks will bend over backwards from someone pulling a paycheck that could get laid off at any time, but for those of us who step forward and take our financial wellness into our own hands, forget it- we’re a bunch of losers according to them!
Anyway, hope it worked out for you Pat!
Scott,
I’m self employed as well. The problem is my line 37 doesn’t look very good. Close to nil. That is line that shows my profit after business expenses, therefore, I never applied to get a house. Now, I need a house imminently. Can I do the tactic you suggest in putting my on my own payroll. I’m already an LLC. Then can I purchase a house and use my parents S.S. money as an additional rental income to qualify??? I have a 770 credit score and a total of 32,000 in credit line with a 10k balance.
Any more idea’s ???
How is the housing crisis, and free fall in home prices, gonna be solved if folks can’t obtain a job? There are an incredible number of people which already lost their homes and millions more will until America starts making something more then excuses. It is time to adjust the trade agreements with the Chinese. For heavens sake, our primary trade partner is known to manipulate its currency!
Hi Pat, it’s great to read about your personal life. I think that it connects you to your audience better. Thanks for the post!
Touche. Sound arguments. Keep up the great effort.
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Nice article, Me and my wife also were in trouble because we did not have own house. Then we plan to buy a home and start checking the home loans,we calculated the mortgage and now we are the owner of a house