How To Buy A Home When You’re Self-Employed

Raise your hand if talking about money makes you uneasy. ?‍♀️ Even though the internet provides more access to information than ever, there’s still a stigma that accompanies any financial conversation. No matter if you have too much money (ha!) or not enough, no one ever seems to be happy with their status. To put it plainly, our financial health dictates our security, our future, and our comfort.

The COVID-19 pandemic has amplified my ambition to be self-sufficient and to generate sustainable income that isn’t reliant on my daily productivity level. To put it in Hustle Culture speak, “work smarter, not harder”. I’m proud to say that since March 2020, I’ve been able to register Rascal Honey as a business, increased my credit score to 700+, and began planning to own a home. Raising your credit score as a business owner isn’t the easiest path to financial freedom, but it can be the most rewarding.

Take Control of Your Credit Score

Staying on top of your credit score is one of the most cliché pieces of financial advice, but that doesn’t make the advice any less sound. Your credit score does not define you, but knowing the details of your report allows you to take steps to positively impact the score. In addition to making payments on time and keeping your debt to credit ratio low, there are credit professionals who can assist customers in raising their credit scores. This post’s sponsor, CreditRepair.com, has seen an average improvement in past clients’ scores of 40 points in just four months*. (* Not all clients saw such a result as all legal cases are different. You should not expect to see the same result and it is not guaranteed.) CreditRepair.com also offers free consultations, providing insight into your current status, and identifying opportunities to improve your credit score.

Your Business Structure

As a consultant and content creator, I was classified as a sole proprietor for many years. Even though making my properties part of an official business was always my goal, I was highly intimidated by the legal process. After years of fear, I finally turned to local programs that offer free support to small businesses & startups. I asked the expert I was matched with every question I had about filing for an LLC, obtaining an EIN, and how my particular business should be structured.

While forming an LLC allows me to open a business bank account, activate a business phone line, and operate as a legal entity, the tax code in my state (Arkansas) hasn’t been updated since the 1970s. This means that I will still be taxed as a sole proprietor, with a substantial portion of my income going to quarterly tax payments.

Making a decision as simple as organizing business and personal expenses into separate bank accounts can not only make your (accountant’s) life easier, but it can also allow you to properly pay yourself. Proof of income has a dominating impact on credit card and mortgage applications, so it’s important to set yourself up for success.

Securing A Self Employed Mortgage

Having the freedom to set your own schedule and work on projects you’re passionate about does come at a cost. Financial website NerdWallet cautions, self-employed people have to “acknowledge that the reality is you’re starting at a disadvantage” when it comes to getting approved for a mortgage. In addition to registering your business and maintaining separate accounts, paying yourself via W-2 could increase your chances of being approved for a home loan.

Not only can low credit scores result in higher interest rates, which means you’ll end up paying more for homes, cars, and credit card balances. But also because of the instability that can often accompany working for yourself, self-employed business owners often have to pay more when buying a home, either through the down payment or higher interest rates. Fortunately, all hope isn’t lost. In that same NerdWallet article, Lenda’s CEO says that an average of 22-24% of approved loans is to self-employed borrowers. It is possible!

If you are trying to take charge of your financial future and forge your own path as a business owner, the first step is to empower yourself with your credit score. Once you know how your report is being negatively impacted, you can create a plan to raise your score, save for a down payment, and ultimately achieve the American Dream of owning your own home.