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The keys to home ownership when you’re self-employed

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People who choose to work for themselves tend to like a certain amount of independence. It takes a lot of gumption to cut ties with the traditional 9-5, and the kind of person willing to take that leap is usually in search of an independent lifestyle.

But, it’s hard to be truly independent when you’re chained to rent payments.

For many of those same freedom-seeking folks, it’s often harder to reach the American dream of home ownership than for those who can prove to a lender they have a steady paycheck. And, as a result, they are forced to jump through a number of hoops in order to get approved for a mortgage.

Thankfully, freelancers and other self-employed individuals can make it work with a little extra effort. Here are a few things you can do to get approved for a mortgage if you’re working as your own boss.

Put down a large down payment

You’ll have an easier time qualifying for a mortgage if you can put up a large down payment. Lenders like to see a down payment of at least 20 percent, but blogger Ryan Guina of CashMoneyLife said he and his wife typically put down 25 percent.

“A larger down payment does several things. It shows the lender you are serious as you have more skin in the game,” he said. “It also reduces the lender’s risk since you are financing a smaller portion of the home.”

Guina also said the more you can put down initially, the lower your monthly payments are likely to be.

If you can put down at least 20 percent, you’ll also avoid paying Private Mortgage Insurance (PMI) every month. PMI protects lenders against loss if a borrower defaults on their loan and is often a requirement for an individual who doesn’t put down at least 20 percent.

Get your documents in order

Guina, whose business is set up as an S-Corp, said he needed to show W-2’s , profit and loss statements and proof of his business accounts and assets.

Before you start looking for a home, talk to a lender to see what documents you’ll need to gather. Organizing documents can take some time, and it’s better to be fully prepared before you find the home of your dreams.

Remember not to compare your journey to your peers who have traditional jobs. That kind of work looks more stable to a lender, so they’ll likely have an easier time getting approved.

You can also look for a lender who has experience with people who are self-employed. They’ll be more aware of what you need to do and more understanding of your financial situation.

Make sure your income qualifies

Freelance writer and blogger Eric Rosenberg of Personal Profitability said lenders typically want to see your business’ last two years of tax returns. If you’ve only been freelancing for a year, you may find it hard to locate a lender willing to work with you.

Keep in mind that lenders want to see your net earnings – not your gross income. That’s where many freelancers run into trouble.

When you work for yourself, deducting as many business expenses as possible is great for reducing your tax liability, but when it comes to lender requirements it usually is not the best route to take.

Since lenders look at your net profit on your tax returns, your net income may not be high enough if you’ve deducted a large portion of what you’ve earned.

“Even if your business has grown dramatically over the last few years, lenders will not use your growth rate to project what you can afford,” Rosenberg said. “They look at the most recent two years’ profits and average that to approve you for a loan.”

However, that doesn’t mean it isn’t important to show your business has grown from year to year.

Lenders want to see your business makes more or remains steady each year. Showing a loss from one year to the next could pose an even worse problem, so make sure your business is thriving – or at least surviving – before you try to get approved.

Don’t get discouraged

Buying a home while self-employed can be more challenging than it would be if you were a salaried employee. But don’t let it deter you.

If at first you are turned down for a mortgage, don’t be afraid to try again. In many cases, there is a solution your lender has overlooked.

Plus, you can always consider another lender who may end up being a little less strict on requirements.

If you are able to find that gem, you’ll be surprised at how quickly they approve your loan even though another could not.

Through a little diligence and persistence, you’ll one day be handed the keys to your own home.

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About Zina Kumok

Zina Kumok is a freelance writer specializing in personal finance. She also writes a blog about paying off her student loans in three years at Debt Free After Three. She lives in Denver with her husband and Beagle mix.

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