How to buy a house while self-employed

How to buy a house while self-employed


Wondering if you can even buy a house while being self-employed? Self-employment and home buying is something your New Orleans real estate agents are quite familiar with! New Orleans is filled with creative types who don’t want to work “for the man.” We want to help you understand how to still buy a home while being your own boss. 


We will never stop your entrepreneurial dreams from coming true, but it’s best to have a clear picture of future purchases. The real challenge, for many, is being able to qualify for a loan and buy a home while being self-employed.


Self-Employment: First Things First

It’s all about the taxable income! If you are even remotely thinking about buying your New Orleans home within the next few years make sure your CPA is aware. 

There are various types of self-employment/contract employee income and it can be shown on IRS forms Schedule C (Sole Proprietorship), 1065 (Partnership), 1120 (Corporation), and 1120S (S Corporation). 

Noteworthy, if you have not been filing taxes, we have a larger problem on our hands. Because you can’t just make money and not pay taxes on it. Well, you can but you won’t be able to qualify for a loan. 


What Self-employment Info Your Lender Needs

The standard requirement is that a mortgage lender needs your 2 most recent years of tax returns. Although, sometimes only 1 year is needed. The need for only one year of tax returns is rare, so plan on having two years. 

What this means is that you can’t be self-employed for 6 months and think you can qualify for a loan. 


Don’t write everything off

Your mortgage lender will average your TAXABLE income. Very few of your expenses can be added back, but 100% of the depreciation can be. 

If you’re wondering what taxable income is, it’s your gross income minus your deductions. In very simple and not legal tax information in any capacity: Your deductions (for the most part) are the expenses you incurred to operate your business. For example, if you made $500 last year and wrote off $400 in business expenditures, you can only be taxed on $100. When making these deductions, you and your CPA should be mindful if you plan on purchasing a home. Because writing off every single, little expense can hurt you when it comes time to buying a home. 

Self-employed people have a tendency to write EVERYTHING off. Legitimate business expenses should definitely be factored in while preparing your taxes. But, every trip to Taco Bell should not be charged off as a “client dinner.”

Take a look at the items you have written off that maybe weren’t true business expenses. These write-offs depreciate your business. Consequently, it will appear as if you make far less money than you actually do. 


What about My Debt

Almost everyone has debt, so you’re not alone. People qualify for loans every day with debt. This is no different because you’re self-employed.

However, using funds from a business account to qualify for a home loan has to be reviewed closely. Your mortgage lender has to ensure that taking the funds for personal use won’t negatively impact the business. If you have a business partner, this must be taken into consideration as well.


What about Payment Plans with the IRS 

Pay your taxes and if you can’t, get on a payment plan. Because you can’t buy a house if you have an outstanding tax lien! It should be noted, that you can definitely still buy a house while on an IRS payment plan though. (One of your real estate agents did it!)

If you’re on a payment plan, lenders need a minimum of 3 consecutive months of payments before you can close on your potential new home. 


Save for your taxes! 

Each time you get paid, take a percentage (determine that with your CPA) and put it aside. This way when your tax bill rolls in, you have the money to pay it! For what it’s worth, Team Be New Orleans is a big fan of the book “Profit First.” This book can help you start operating as a real business. 

Being self-employed can be difficult some days when times are leaner. However, when you stick that tax money aside – don’t touch it! 


What about K-1s?

If you receive a K-1 and you have 25% or more ownership in the business, your lender will require business tax returns.


In conclusion: self-employment & home buying

Every situation is different. But, if you don’t pay your taxes, the government isn’t going to allow you to qualify.

Noteworthy, they make the tax codes and mortgage guidelines. What does that tell you? It also means, they make the rules. 

Although, if you save up the cash and purchase a home without a loan, you don’t have to follow the guidelines set forth in obtaining a mortgage. 


If you’re thinking about buying a house in New Orleans and haven’t filed your taxes yet – speak with your local mortgage lender first! They can chat directly with your CPA, and give directions on how to file your taxes, to help you qualify for a mortgage. Being self-employed and buying a home is definitely obtainable – you just have to know how to do it. 


Need to know more about being self-employed and buying a house? Let us connect you with our favorite local lenders! Send a text! 


Do’s and Don’ts When Home Buying

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