How To Make Home Ownership a Reality When Your Income Varies Month To Month
/Owning a home is a dream many Americans have. This dream makes lots of sense when you consider that owning a home allows you to build equity and gives you access to other creative freedoms that renting is unable to provide.
However, as a self-employed individual, this prospect can seem daunting, especially when your income fluctuates throughout the year. If you have variable income, it is still absolutely possible to buy a home. Below are three things you can do to empower yourself in the journey to homeownership on a varying income.
1.Understand Your Credit and How to Improve It
Most people know the basics of credit: that it is a culmination of three scores from Experian, Equifax, and TransUnion, and it represents how likely you, the borrower, are to repay debt based on past payment history. Despite knowing the basics, you may not be aware of how to improve that number. Believe it or not, there are many relatively easy ways to improve your credit score. A step you can take today is to make sure all your credit payments are set to auto-pay. This will ensure that your payments are always on time, eliminating the possibility of forgetting a payment and having it impact your score.
A lesser-known piece of credit knowledge is that you can contact all the credit bureaus listed above and dispute any errors you find in their reports. Taking this step puts the power back into your own hands and makes sure your credit history accurately reflects your ability to make payments. In addition, knowing what credit score is needed to buy a house can give you a benchmark to reach towards. A score of 760 or better is considered ideal for buying a home. This range provides you the most options for loans, as well as better rates, reducing the lifetime cost of the home over the course of your mortgage. Understanding and improving your credit is one of the most important steps you can take on your journey to homeownership.
2. Keep Updated Business Records
Those with traditional employment can submit W-2 statements to a bank when applying for a mortgage. However, when you’re your own boss, the responsibility falls on you to provide proof of income. Therefore, it is important to know what documentation you need when applying for a home loan.
Be sure to have two years of tax returns on file. If you are behind on filing your business taxes, this is a key step to take before considering a home purchase. These records will provide a basis for how much you can afford to pay each month, so you can determine how much house you can afford. You will also need to have other documents available to your lender, such as business and personal bank statements and records of any other income. These records include your profit and loss statement, balance sheet, and other documentation to verify the financial health of your company.
3. Create a Plan to Save for Mortgage Payments
Finally, you will need to make sure you have a plan in place to meet monthly mortgage payments. A good first step is to start with a substantial down payment. Many loans require a 20% initial down payment, but you may qualify for a mortgage with lower down payment requirements. However, if you can, try to maximize your down payment, even if it means saving for longer or cutting costs in other areas of your life. The higher your down payment, the lower the burden is on you each month, as your mortgage payment will be lower.
Another great step to take is to use your past income as a guide to know how much to put away each month for future payments. Are there times of the year your revenues are higher, and months where you have historically made less? Take a percentage out of your income during those times when you’re making more money and save it for future payments.
One Last Thing
Owning a home is like any other goal: the most important thing is to have a plan in place. You can empower yourself in this journey by broadening your knowledge of personal finance, investing, and how to build and grow your wealth.
