Buying a home is a huge step in life, and though they make it look so simple on TV, it is no easy feat. Especially if you're a freelancer. Since SD and I are both freelancers, this meant our home-buying process was a little more complicated and drawn out than "normal." For those of you who are thinking about and planning for buying a home at some point, here is an inside look at our process, with a few helpful tips thrown in for good measure!
Gather Financial Documents
The first step in our mortgage application process was to pull together several documents:
- Tax returns (last two years)
- W-2s (last year)
- Pay stubs (current year)
- All bank statements
- checking, savings (last two months)
- Investment accounts
- Roth, IRAs (last quarter)
After this initial pile of paperwork (collated, paper-clipped, and neatly marked with Post-its, might I add), we thought we were golden.
Tip: Be prepared to provide more documents and proof of employment down the line.
Prepare a Profit & Loss For Your Business
About three weeks after our loan application, our broker asked us to provide signed profit & losses for each of our self employment businesses. A profit & loss is a spreadsheet that shows how much you've made year-to-date (YTD) and how much you've spent on your business.
They also asked for written descriptions of each business (including number of years we'd been doing each thing) and letters of explanation for instances when income went down (for us, this was because we separated our income into an additional Schedule C last year, making it appear that the original Schedule C was less than the previous year).
Tip: Make sure the business name you put on your profit & loss matches the business name you use on your Schedule C.
Show Proof of Self Employment
For further proof of employment, they asked us to attach copies of invoices, check stubs, contracts, and proof of sales. They wanted to see that we had been steadily self employed for at least two years.
This was basically like doing our taxes mid-year. We added up all of our income, outstanding invoices (invoices we've sent out that haven't been paid yet), business expenses (equipment, software, materials, business meals (50%), phone, etc.), and estimated taxes paid to date.
Tip: Keep good records! Save copies of contracts. Create invoices for your clients and save a copy for yourself.
SD and I have six self employment businesses between us, so this was no small task. The packet was over 50 pages when we sent it in!
Gather More Financial Documents
As our targeted closing date drew closer (we didn't actually know our closing date until two days before!), our broker asked for updated copies of all our bank statements, evidence of transfers to and from certain accounts (to show where the down payment money came from), and letters of explanations for transfers that looked like deposits (i.e. No, we didn't win the lottery or get a large check from a wealthy benefactor. Not that that isn't allowed, mind you, it just requires special reporting and extra paperwork).
We pulled electronic copies of all our bank statements, but since most run through the last day of the month and we were closing mid-month, we also had to request stamped transaction lists (for certain accounts) from our banks to show transactions up to the day before closing.
Tip: Transfers take time. Give yourself a few weeks to move money around and get everything you need for your down payment and closing costs into one account (ideally, a local bank where you can order a cashier's check on closing day!)
Like I said at the beginning, buying a home is no easy feat. But, if you go in prepared, organized, and knowing a bit more about what to expect, it does make the process a little smoother and more manageable. Happy home-buying!