If you live in Austin, you’ve probably noticed a trend in the past few years. Any time you’re talking with other Austinites, conversations increasingly find their way to one or both of two common subjects:
- Austin’s traffic
- Austin’s real estate market
The two subjects have the same cause – the city’s rapid growth – but only one of them stands to potentially benefit current residents over time.
The city’s housing prices hit an all-time high last year and no one familiar with the market expects things to slow. Forbes has called Austin the best city in the country to invest in real estate. Predictably, renters are seeing their monthly rates go up as well, leading many to decide that it’s time to think about buying.
For those of us who work freelance, the process of taking out a mortgage is a little more complicated than it is for our counterparts who take home steady paychecks. While being self-employed does change how lenders approach an application, it won’t keep you from getting a mortgage if you’re financially ready for the commitment.
I talked to Loan Officer Silvia Ward Carden of United Lending about the main things freelancers should be aware of when considering taking the plunge into homeownership.
If your plan is to purchase a home a year or two out, you have some time to start making moves now that will put you in a better position to be approved down the line.
Save for a Down Payment
When you can put more down, “it opens up more options,” explains Silvia. Many homeowners take advantage of programs that only require a low down payment rate of 3.5%, and for many freelancers those are a viable option. The only catch is that it means lenders will have to take into account your tax returns for both of the past two years and take the average of your earnings after expenses.
If your profits last year were great, but your earnings the year before were weaker, or if you made some costly investments for your business that you wrote off in your earlier tax return, that will work against you. If you put down 10-20%, a lender can just look at last year’s return, along with factors like your credit score and recent bank statements, to determine what you qualify for.
Don’t Take Out Any New Loans
Thinking about buying a new car? If you can, hold off on that purchase. According to Silvia, “having a new car payment, boat payment, personal loan or what have you will have a direct impact on the loan you’ll qualify for.”
Lenders look at how much debt you already have to try to figure out how much more you can likely afford to handle. The amount of debt you hold and the monthly payments you’re expected to make on your existing loans are factored into their calculations. The lower those numbers are, the higher the amount they’ll be comfortable lending you.
Buying a car after you buy a house will be a much easier purchase than if you try to do it the other way around.
Be Careful With Your Deductions
We freelancers love our deductions come tax time. Our tax obligation is so much higher than what our friends in traditional jobs pay; we’ll take whatever legal breaks we can get to bring that amount down.
In most years, making sure we take every possible deduction is a smart move. In the year or two before you buy a house, it can hurt you. “Because you can write off so much more as someone who’s self employed,” says Silvia, “lenders will look at what your income is after you write off all those expenses.”
In other words, a move that smartly saves you money on April 15 could keep you from qualifying for a loan big enough to purchase your dream home the next year. That’s not to say that you should forego all your deductions if you’re hoping to buy a house in the next year, but it does mean you should think more carefully about the business expenses you take on and weigh the costs and benefits of including those deductions on your return when the time comes.
When It’s Time
When you’re confident you’ve made the right financial choices to be ready to buy and are starting your search, here are the next steps to make.
Know Your Price Range
You may want to talk to your accountant at this stage. The main things you need to figure out are:
- How much can you afford to put down?
- What can you comfortably afford to spend monthly?
- How much can you afford to keep in an emergency fund for repairs, moving expenses, etc?
The answer to each of these questions will influence the others – the amount you put down will influence how much you pay monthly and if you put all your savings into the down payment, you won’t leave much for your emergency fund (and trust me, you will have expenses you don’t know to account for in those first couple of months, especially if you’ve never owned a home before).
This involves some complicated accounting and, if that’s not your strong suit, it’s worth asking for help. Buying a home is often a good financial decision, especially in a market like Austin’s where the prices seem poised to just keep going up, but that’s only true if you choose a house that you can reasonably afford.
Prepare Your Documents
Your lender will need to see some proof of what you’ve made in the past and are making now. Since we don’t have consistent salaries; that involves a little more paperwork.
The main things you’ll want to gather to provide to your lender are:
- Tax returns (corporate and personal, if applicable)
- Any 1099s you’ve received from clients
- Recent bank statements
- In some cases, you’ll also need documentation of where the deposits in your bank statements came from, such as an invoice that matches the deposit amount
Most applications will ask you to list all the debt you have now, so have those numbers handy as well.
You ideally want to be pre-approved before you reach the point of putting an offer on a house. It makes your offer stronger if the seller knows you have funding.
If you go to several lenders to get quotes and pre-approvals, try to get all those applications out around the same time. A lot of checks on your credit at one time shouldn’t have a negative effect on your credit score as long as there’s a clear common cause behind them, but if they’re staggered over several months, that can start to look bad.
If you’ve done your math, don’t be discouraged.
I bought a home myself last year. For an important decision like taking on the biggest expense of my life, I wanted room to be picky. I reached out to seven or eight different lenders so I could see a range of options and how they compared. One of those lenders was quick to tell me that, based on my tax returns of the last two years, purchasing a home in the price range I had in mind was impossible. He was wrong. I’d already been pre-approved by multiple other lenders who had gone to the trouble of finding out how much I planned to put down.
If you’ve done the math and you’re confident that you know what you can afford (and especially if your accountant has backed you up on that), don’t be dissuaded if you have one bad experience. If you get a similar response from several lenders, you may need to re-think your price range, but don’t take one person’s word as gospel. Get out and see what other lending professionals have to say.
And be willing to ask lenders if they have experience working with people who are self employed, those that know the drill are likely to be more helpful through the entire process.
The money itself is only one part of the process of buying a home. Once you’re pre-approved, that’s when the most important part happens – finding the right home for you. If you work from home like many freelancers, you’ll be spending a lot of time in that house. Make sure it’s one you love.
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