Buying a House When You’re Self-Employed? Here’s What You Need to Know.
Ever wondered if changing jobs would affect your chances of getting financing for a new home? You’re not alone. This is actually a common question buyers ask.
Changing jobs to a different company when you’re classified as an employee (i.e., you’ve got a W2) doesn’t usually affect your chances of mortgage loan approval.
Even if the change happens while securing financing for a new home, having a W2 means your employment status is lower risk. Consequently, underwriters of the loans are willing to lend you money because you’ve got a stable income.
But if you’ve pursued the dream of being an independent business owner, you’ve gotta play by different rules. And if you don’t? Well…it could cost you big time.
How Self-Employment Affects Mortgage Approval
If you’re self-employed or at a job that pays commissions, the lender will want to see two years of financial history from your business or job to track what you’re actually making.
In other words, you need a more extended financial history to prove to the underwriters and lenders that you can afford your mortgage.
But what if you don’t have that long of a financial history?
Settle in, my friend, because I’ve got a story for you.
I once represented sellers who went under contract with a couple. The husband was the primary provider, so the financing was based on his income.
During the home-buying process, he transitioned from his 9-5 to do the same work under a self-employment status for a nonprofit.
Despite being aware of his employment transition, the lender didn’t check to see if the couple still qualified for their financing.
A week before we were set to close, the buyers found out they couldn’t get financing because of the husband’s new employment status.
They lost out on their dream home because of their lender’s oversight.
To make matters worse, they lost out financially too.
The sellers were asking for $5,000 in an earnest money deposit. But the buyers’ realtor recommended they offer $10,000 in earnest money to make their offer look more appealing.
So when everything fell through, the buyers also lost the earnest money deposit. The wrong advice from their realtor cost them big time financially,$10,000 instead of $5,000. Not to mention the emotional stress of losing out on their dream home. (I’m telling you, who you work with really matters.)
Does That Mean You Can’t Qualify For A Mortgage?
Before you resign yourself to apartment life for the next year or two, you should know the story I just told you has a few elements that may not apply to you or your situation.
So it’s quite possible that you could be approved for a loan despite having less than two years of financial history with self-employed status.
Having More Than One Income in Your Household
In this story, the buyers were on only one income. If you are a two-income household and the second income reasonably covers the mortgage, then you might receive approval with a less established self-employment financial history.
The bottom line from an underwriting perspective is that you can make your mortgage payments. So proof of consistent income covering the full amount of the mortgage is what’s needed.
Getting a Co-signer
Another option to increase your chances of approval is getting a co-signer. Not only would their income be considered, but their credit score would be considered too. So this could help you in two ways.
It’s vital that you and your cosigner understand what goes into cosigning a mortgage loan. For example, defaulting and late payments can affect both of your credit scores and put your cosigner in hot water financially.
Pro Tip: Your co-signer should be:
Someone who has good credit
Someone you trust and who trusts you
Easy to get ahold of and responsible with their money
Final Thoughts
It may feel like you have to choose between your dream job and your dream home. But it doesn’t have to be!
With a little planning and timing, you can transform your life in both of these ways.
If you’re a single-income household looking to start a new job in a new home, my best advice is to close on your house before setting off on your new adventure.
Need a savvy realtor in Colorado who’s got your back?
Want a short list of lenders you can trust in Colorado?
Send me an email! I’d love to help you secure your dream home.
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