Home buying and being self-employed
Being self-employed has many benefits, yet there are some drawbacks, and buying a home can be one of them. Often times verifying income for persons who are self-employed can be tough. There are a few things you should know.
1. Be prepared to show your taxes. Taxes can be the key to your loan. While you don’t want to expose yourself to more taxes, you want to make sure you show enough income and pay taxes for the income you need to show to qualify for the loan. This may mean you don’t take some of the deductions you can rightfully take off your taxes or you postpone making an investment till the following tax year. An easy example would be deductions for your vehicles. If you use the mileage deduction, you may want to reduce the mileage or don’t claim some of the gas or the miles. Keep in mind, depreciation does not count against your income; therefore any depreciation will get added back into your income. So it is a balancing act.
2. Don’t make any large undocumented deposits or withdraws. The lender will want to see your accounts and will have questions if any inconsistent deposits or withdraws happen. Be prepared to provide documentation! If you sold a car, keep a copy of the bill of sale.
3. Get all of your financial documents ready. It’s a good habit to keep all of your personal and business documents in a neat and organized fashion. Some business owners are going paperless, they scan or save all of their bills into one place. Quickbooks offers an app so you can take a picture of your receipt and record the transaction as you go. Don’t want to go paperless, use an old style file folder. The method you use is less important than the fact that you are using a system.
4. Find a good CPA, if you having already. A good CPA will take care of you in tax time and if you are subjected to a random audit. They will find your deductions and help you plan. They will allow you to focus on your business while they will take care of your bills. They will suggest a budget and at times will tell you to make a purchase to save money on taxes.
As a small business owner, you need to work close with your lender. Knowing it may take longer to get a loan being self-employed. Start with the lender early, some lenders like McLean Mortgage offer a product called Loan First. Their loan first product performs all the underwriting on you first. It is such a strong preapproval many sellers treat buyers using Loan First product as a cash buyer. When you have the loan first pre-approval, all you need is for the house to qualify for the loan and you can close within a couple weeks.