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Can You Buy a House if You’re Self-Employed?

buying a house when self-employed

You might have heard that it is harder to get a loan if you’re buying a house when self-employed because of no stable income. 

It is also true that some financial lenders are wary about lending to people without a stable income, not forgetting the amount of paperwork that goes into it. 

But, that should not deter you from wanting to own a house or make you start looking for a job to prove that you can pay back the mortgage. 

Here is everything you need to know about buying a house when self-employed and tips to increase your chances of getting your next home. 

Buying a House When Self-Employed. Is it Hard?

When you work for yourself, you will need to produce more paperwork during the loan application process compared to someone who has a full-time job. The lender will need to see your business records, money that is coming in and going out and your source(s) of income.  

If you don’t have proper systems in your business, it is hard to produce this information because you don’t know where to begin. This in turn will decrease your chances of getting a loan.  

With working-class people, it is easy to produce payslips from month’s back which will show the source of income. This also shows the credit score because it gives an idea of their financial habits. 

Does the Employment Duration Impact the Loan Application? 

Yes, it does. For instance, from the start of your business, there is a capital investment put it. There are also expenses that you incur. There are taxes to pay and operational costs. 

If you have been in business for a year, your financial records should show balanced books and that your business is making money. 

Because if all that you are doing is going on losses as a business, it will be hard to prove that you can pay off a mortgage.

Therefore, you should have a minimum of 2 years in business. If you have more and are making money, the better because it will show that you have a stable source of income. 

And if you haven’t been keeping records of you’re finances, worry not. You can always start doing it now. Better to start than to live with regret or what-ifs. 

What Documents Do You Need When Making a Loan Application? 

Here is some of the information you will need to present to the lender. 

  • Identification information i.e. National ID or passport
  • Bank statements for at least 12 months
  • Book of accounts i.e expenses, income and tax records
  • Business information e.g. registration, client testimonials
  • Debt records you might have at the time of application

Lenders will want to understand your spending habits. Don’t be surprised if they ask for information about your house bills, transportation, holidays, hobbies, credit cards payments or car loans (if any). 

Do You Qualify for the Same Mortage Rates as Employed People?

Ideally, yes. So long as you can show your source of income, you will get the same rates as employed people. However, the rate depends on your deposit and your credit score. 

With a low deposit or credit score, you might have to look for a lender who specializes in custom loans to entrepreneurs. 

How to Get Closer to Buying a House

If you have goals of owning a home in the near future, here are some of the things you can start doing today which will get you closer to getting approval. 

Minimize Your Business Expenses and Increase Revenue

For any business to succeed, it should have minimal expenses and good revenue coming in. Whether you are in a product or service-based business, find ways of cutting down costs by:

  • Looking at your processes and see what you can automate.
  • Marketing your business online to reach a wider audience.
  • Scrutinizing your spending and seeing how you can decrease your business expenses.

Keep in mind that reducing costs shouldn’t be at the cost of ruining your business reputation. Your brand represents you and your reputation. Build trust with your customer by delivering quality products or services. 

Pay Off or Reduce Your Debt

Be honest with yourself and look at areas in your life where you could be spending less. If you have other smaller loans, clear them on time and get into the habit of not constantly borrowing. 

When you’re getting a loan, your credit score matters and you happen to pay off the smaller loans late, it could end up lowering the score. 

Separate Your Business and Personal Finances

There are many benefits to separating your finances when you’re self-employed. 

  • You can easily track your business cash flow and success
  • It’s less of a nightmare when it comes to paying taxes
  • You won’t spend business cash on personal matters
  • It gives a true picture of your business health

Save. Save. Save.

No one starts a business with hopes of it failing. However, it is an aspect of business that you should consider. 

If the business isn’t as successful as you thought it would be, having a safety net or emergency fund can save you when applying for a loan. This shows the lender that you have financial literacy which builds trust. 

This saving will also come in handy if you plan to use it as a down payment. The higher the amount you put as a deposit, the better interest rate you will get.  

Do Proper Research

Let’s assume you follow the above steps and are now ready to find a lender. 

The best place to start would be on the internet. There is a ton of valuable information that will help you compare rates, learn more about the lender, see customer reviews and get you closer to your goal of buying a house. 

Another way is by asking your friends who have taken such loans in the past. 

Conclusion

Buying a house when self-employed should not worry you into thinking that you won’t get a mortgage. The most important part is proving to the lender that you can pay off the loan and this happens by having the right documentation in place. 

You might have to work extra hard than someone who has a salary at the end of the month but it’s necessary and you can do it.  

WRITTEN BY
Maureen Mbithe
Content Writer at BuyRentKenya
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