Buying a House? You Might Need This One Unexpected Thing

This post may contain affiliate links which may compensate us based on your interaction. Please read the disclosures for more information.

In some cases, proving your income to a mortgage lender could be harder than expected. Read on to learn whether you really need a W-2 job to buy a home. 

Right now certainly isn’t anyone’s definition of a good time to buy a house. According to Redfin data, there were just 1.4 million homes for sale in April 2023, which translates to only a two-month supply. It takes a larger supply of homes (four months or ideally more to equalize the market) to meet buyer demand, so already 2023 isn’t a good time to buy a home. And when you take into consideration higher mortgage rates (as of this writing, the average rate for a 30-year fixed-rate mortgage is 6.57%, according to Freddie Mac), it’s just bad news all the way down.

What if despite all these factors, you’re still chomping at the bit to buy a home? Depending on your employment situation, you might face more of an uphill climb to secure a mortgage loan. But do you really need a W-2 job to qualify for a mortgage loan?

Being self-employed means more hoops to jump through

If you’re a small business owner or freelancer, it’s best to go into the home-buying process as informed as you can be. In terms of proving income (which is how a mortgage lender will be able to tell you can afford to repay your mortgage loan), you’ll need to do more legwork.

A regular employee can prove their income via pay stubs and a W-2 to show income for a whole year. If you’re self-employed, you can expect to show income records in the form of personal and business tax returns, balance sheets, and profit and loss statements, according to Freddie Mac.

In addition, you might also need to prove that your current income is stable (or ideally, growing) going forward (because, again, mortgage lenders need to know you’ll be able to repay your loan). You might need to collect letters from clients or a statement from your CPA to attest to this.

Don’t lose hope, however. Thankfully, there are a few steps you can take to make yourself a more appealing borrower as a small business owner or self-employed person. And while switching to a W-2 job may be an option for you, if it’s not a move you would make under other circumstances, it’s probably not the best solution to getting a mortgage loan.

Focus on these areas before applying for a mortgage

Making the following moves can help ensure you don’t need a W-2 job to get approved for a mortgage.

Work on your credit: When buying a home, as in many aspects of personal finance, having a strong credit score can work in your favor. Go through your credit report and look for errors that could be dragging your score down, and commit yourself to making all your debt payments on time and in full, every month — payment history is a major part of your credit score.Pay down debt: Going into the mortgage process with less debt will make you look far better to lenders, as it will lower your debt-to-income ratio. Plus, paying down debt will also improve your credit score.Save money: You generally need a down payment to buy a home (and the more you can put down, the lower your monthly payments will be and the more equity you’ll start with). If you’re self-employed, having more money to put down and more money saved to show a lender can help you get approved. If your income fluctuates, this could be even more crucial.

While buying a home with income from a W-2 job is certainly more straightforward than buying while self-employed, don’t think you’re doomed to rent forever. Get your paperwork in order, make the moves above, and when the time is right for you, go buy a home.

Our picks for the best credit cards

Our experts vetted the most popular offers to land on the select picks that are worthy of a spot in your wallet. These best-in-class cards pack in rich perks, such as big sign-up bonuses, long 0% intro APR offers, and robust rewards. Get started today with our recommended credit cards.

We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

 Read More