Buying a house isn’t necessarily ever “easy,” per se, but it’s safe to say that it’s more difficult now than before the COVID-19 pandemic changed our world. The reason for this is two-fold. First, mortgage rates are higher than they were in the salad days of 2020 and 2021. They started to climb at the start of 2022 — during the first week of that year, the average rate on a 30-year mortgage loan was 3.22% (per Freddie Mac). Now? You’re looking at 6.61% for that same mortgage.
Home prices are up overall too. The National Association of Realtors reported that the median cost for an existing home was $387,600 in November 2023, and that’s a bump of 4% over just a year prior.
High rates and high prices mean that current homeowners are more reluctant to list their homes and jump into the fray with the rest of us, worsening the problem. The same NAR report noted that November 2023 saw an inventory of just 1.13 million homes for sale — that sounds like a lot, but it’s not enough to satisfy demand.
Buying in “even harder mode”
What if you’re hoping to buy a home in this difficult market, but you’re self-employed? Join the club. If you don’t have a predictable income, you pose a larger risk to a mortgage lender. Mortgage lenders assess whether a given mortgage applicant will be able to pay them back, based on income, credit, and a variety of factors. So if you’re self-employed, it’s in your best interest to make the following moves to show them you can be trusted.
1. Pay down debt
Going into homeownership with as little existing debt (say, on credit cards) as possible is a good move no matter your job situation, but it might be even more crucial if you’re self-employed. If your income fluctuates, a lender will wonder whether you’ll consistently earn enough money to satisfy all your financial commitments, especially the large mortgage loan it’s extended to you. If you don’t have a bunch of debt payments to make regularly on top of your mortgage, utilities, insurance, and other bills, you’ll look even better to a lender.
2. Boost your credit score
Your credit score is one of the most important factors in mortgage loan approval, so approaching yours with a laser focus will pay off. In addition to paying down existing debt, getting better about making all your payments on time, every time, will also boost your score. Payment history makes up a whopping 35% of your FICO® Score.
Another move to make? Get copies of your credit reports (free from AnnualCreditReport.com) and read through them for errors. Credit report errors are common, and if you spot any, you can dispute them with the credit bureau that issued the report. Once they’re removed, you’ll see a score bump.
3. Make a larger down payment
While a 20% down payment is the general recommendation for home buyers (as it’ll allow you to avoid paying for private mortgage insurance on a conventional loan), it’s not necessarily a hard requirement. That said, if you’re self-employed, a 20% down payment will likely work in your favor with a lender. If you can’t swing 20%, I understand, and I’m in your shoes. My target is a 10% down payment, and that, coupled with my exemplary credit score and no other debt, will see me through.
4. Keep excellent income records
Finally, as a self-employed borrower, you’ll need to provide additional proof of income to a mortgage lender when you’re applying. As such, it really pays to keep excellent records of your earnings. You won’t be able to show a lender regular paycheck stubs or W-2 forms that reflect an entire year’s wages from a traditional job. Instead, you’ll provide bank statements, tax returns, and profit and loss statements. Keeping good records will also make it easier come tax time, so I recommend this move to all self-employed people, regardless of whether they want to become homeowners.
Buying a house at all right now is definitely “hard mode” — but doing it while self-employed is even harder. Give yourself the best shot at success with these moves.
