One of the hardest things for self-employed people of all stripes, whether they are hair stylists, electricians, architects, or lawyers is figuring out how to make their up-and-down income cycle match what the financial world needs in order to give them a loan for a home. Since 2009, the income and financial requirements necessary to purchase a home have gotten stricter than ever. Self-employed individuals have borne the brunt of those changes, and tools which were being correctly used to assist 1099-earners buy homes are now stringently regulated, due to incorrect use during the heyday of the subprime mortgage.
First, you’ll want to familiarize yourself with the three most common strategies for self-employed borrowers. We’ve outlined them in a previous post, but here they are again:
However, the best long-term strategy is typically to purchase multi-use property. Multi-use properties are those such as duplexes, quadplexes, commercial downstairs/residential upstairs, and lofts. Loans for these types of properties are generally considered commercial, even if the borrower is individual. These types of properties are typically zoned “NC” (neighborhood commercial) or mixed-use (commercial bottom-floor).
For the average home buyer, this can be confusing. But if you have an LLC, you’re likely already thinking of yourself as a business, and so purchasing this type of property will be relatively straightforward. Rates for commercial loans are going to be slightly higher, and the loan length will likely be shorter. With interest rates as low as they are, some commercial lenders structure the amortization on a twenty or thirty-year schedule, but review the note at five-year intervals. You will likely put between 20% and 40% down.
However, the big advantage to buying multi-use properties is that the potential income of the entire property (even if you will be residing in one of the units) is evaluated first, and the borrower second. This means that if you’ve got the down payment, and the rental income is going to meet or exceed the monthly mortgage payment, your income matters much less, and your status as a 1099 earner won’t be an impediment to the mortgage.
If you’re looking into a commercial loan as an alternative to residential, we can help. Contact firstname.lastname@example.org or 800-584-2442 to learn more and start the pre-qualification process.