Jammie pants and slippers. Dog curled up at your feet. Your favorite TV show playing in the background. Sound like a quality weekend day? Not so fast. For a growing number of Americans, it’s what a regular ‘ole workday looks like.
We’re not necessarily talking about a work-from-home scenario (although this is another growing workforce trend). And it goes beyond having flexibility to work from wherever you want (and wear whatever you want!). It’s self-employment, and it’s on the rise. FreshBooks’ second annual Self-Employment Report found that, “Some 27 million Americans will leave full-time jobs from now through 2020, bringing the total number of self-employed to 42 million,” said the New York Post. “The report defines self-employed professionals as those whose primary income is from independent client-based work.
But self-employment can also make it difficult to buy a home. “Lenders are primarily concerned that all applicants, including self-employed workers, have the ability to consistently repay the mortgage,” said U.S. News & World Report. “They’ll need to see that your income is high enough to pay for the mortgage and likely to continue, and that you have a good track record of repaying your debts.”
These tips can help you get yourself in a better position.
What do you need to show?
Showing two years of steady income is a basic requirement for just about any mortgage, but those who have an employer other than themselves may have more flexibility. Other factors, such as income, savings, down payment, and debt-to-income ratio can make that two-year rule less critical.
Those who are self-employed, however, will want to show as much income history as possible. “Mortgage lenders typically require self-employed individuals to show two years’ worth of self-employment income to prove that they have a steady revenue stream,” said The Motley Fool. In addition, “You’ll have to provide tax returns from the last two years, and you may also have to provide a list of your existing debts and assets. Business owners may have to provide profit and loss statements from the last couple of years.”
How to treat business expenses
Adding to the challenge is the fact that lenders are going to be looking at your income after deductions. “Self-employed workers also might write off a significant portion of their income as a business expense, minimizing the size of the mortgage they’re able to obtain,” said U.S. News. “Because mortgage underwriters typically look at income after expenses, your taxable income may be too small to qualify for the mortgage you want.”
Managing your debt-to-income ratio
“Most mortgage lenders will not give you a loan if that ratio is greater than 43%—that is, if more than 43% of your income is going toward paying off debt each month,” said The Motley Fool. That debt-to-income level is key in any mortgage approval scenario, but takes on added importance when everything is under a self-employment microscope.
“It’s important to make sure you keep your debts down to a manageable level. They should never exceed 43% of your income, and it’s best if you can keep your obligations under 36%,” they said.
How’s your credit score?
Credit scores are even more important if you’re trying to prove you’re worthy of being approved for a mortgage. “Even if you’ve been wildly successful after striking out on your own, having a lousy credit score will hinder your chances of getting a good rate on a mortgage,” said Bankrate. They recommend checking your credit before you start applying, which will give you an opportunity to pay down debts or spot errors on your report that could be dragging your score down.
Homes that are located in rural or semi-rural areas can be more difficult to find financing for when researching conventional loans. Homes in these areas by nature are somewhat isolated as well as remote. This is important as it relates to identifying comparable sales in the area. When lenders evaluate a loan application there are actually two separate approvals going on- one for the applicant and one for the property. The applicant will provide income and employment documentation as well as copies of bank statements and more. A credit report will be pulled and reviewed.
As it relates to the property, the lender wants to make sure the property is marketable. This simply means how long would it take to sell the home and how are other homes in the area selling? This is primarily answered with the completion of a property appraisal. The appraisal compares the subject property, the property under contract, with similar homes in the area. Appraisal guidelines then ask the comparable sales be relatively near the subject property, at least three of them, typically less than one mile away and have sold within the previous three to six months. But there’s the problem with a conventional loan- it’s highly unlikely such comparable sales can be documented. But that’s where the USDA loan comes into play.
The United States Department of Agriculture oversees the USDA home loan program. First introduced back in 1935, it was an inducement by the federal government to help people buy homes with as little cash to close as possible while at the same time moving people and homes into sparsely populated areas. As long as the applicants used the USDA program to live in the home as a primary residence, it was a welcomed program.
Today, the zero-down USDA loan is still used to finance homes in rural areas and the rates and terms are extremely competitive. Buyers can get the loan directly from the USDA but it’s much easier to work with a lender experienced with this program. If you take a quick look at the timeline between working directly with an experienced mortgage loan officer with applying with the USDA and all the bureaucratic baggage that would carry, the local loan officer is the preferred choice.
The USDA loan also carries a guarantee to the lender should the loan ever go into default. Should a home go into foreclosure, the lender is compensated for the loss. Just like other loan programs that carry a guarantee to the lender, the guarantee is financed with a form of mortgage insurance. And in the case with a USDA loan, two such policies are attached to the loan. The upfront policy, called the guarantee fee, is 1.00% of the loan amount but does not have to be paid for out-of-pocket but instead is rolled into the final loan amount. There is also an annual premium that is paid for in monthly installments along with the principal and interest amount, property tax and homeowner’s insurance.
There are a few restrictions that come with the program, one of which is making sure the home being financed is located in an approved area. These areas are identified via the U.S. Census Bureau when the Census is taken. What’s interesting about this is areas that look nothing like “rural” but more suburban in mind it still may be an approved area by the Census Bureau. If an area increases in population since the last Census was taken, buyers can still take advantage of this zero-down loan. That is, until the next Census comes around.
When someone sees a potential purchase, the first thing to do contact the loan officer and provide the property address. The loan officer can then look up the address to make sure it’s eligible. Second, there is also a limit on household income. All occupants 18 years of age and older must report gross monthly income. The lender will then make sure this income does not exceed 115 percent of the median income for the area.
One final mention- the USDA loan comes in one flavor and one flavor only, the 30 year fixed rate loan. There are no other loan term options but at the same time there is no prepayment penalty so borrowers can pay any amount they wish beyond the required 30 year monthly payment.
Down payment standing in your way of becoming a homeowner? Coming up with the cash is so yesterday. You may be able to use your sweat equity to get in the door, instead.
The Department of Housing and Urban Development (HUD) just announced it will be awarding $10 million in sweat equity grants to nonprofit housing organizations through its Self-Help Homeownership Opportunity Program (SHOP). “The funds, combined with labor contributed by the homebuyers and volunteers, will lower the cost of homeownership for certain buyers,” said HousingWire. “According to HUD, through the program, homebuyers contribute ‘significant sweat equity’ toward the development of their housing units or the units of others participating in the local self-help housing programs.”
Low-income homebuyers can work toward their down payment through activities including “landscaping, foundation work, painting, carpentry, trim work, drywall, roofing, and siding. A minimum of 100 sweat equity hours is required from a household of two or more persons, while a minimum of 50 sweat equity hours is required from a household of one person.”
More than half of the money in this round of grants is earmarked for Habitat for Humanity, which they will apply toward at least 284 SHOP units for low-income homebuyers who meet the sweat equity requirement. HUD has a history of awarding SHOP grants; they provided $9.9 million in sweat equity grants in 2016, $13.5 million in 2011, and $25 million in 2006.
The FHA isn’t the only place buyers may be able to use sweat equity to help with their down payment. The Home Possible mortgage, which already offers one of the lowest down payments around at a minimum of three percent, is another option. “Do-it-yourselfers can apply sweat equity to assist in meeting their down payment and closing costs, co-borrowers who do not live in the home can be included for a borrower’s one-unit residence, borrowers are permitted to own other properties, and more—all with competitive pricing and the ease of a conventional mortgage,” said Freddie Mac.
Freddie Mac recently expanded the program so that borrowers can “cover their entire down payments with sweat equity,” said Tim and Julie Harris Real Estate Coaching. “The Home Possible Sweat Equity Offering supports renovations of aging homes and provides borrowers with an additional form of down payment instead of cash, particularly in rural areas,” said a spokesperson for Freddie Mac. “Borrowers can use sweat equity with no limits on the amount that can be applied to down payments, provided that the labor performed is completed in a skillful manner to support the appraised value (of the home) and is certified by an appraiser.”
More than 150 million tax returns are expected to be filed to the Internal Revenue Service this year. It’s likely some may have errors. Don’t let it be you. Every year, tax professionals usually see the same common errors, with varying consequences.
This year is extra thorny because taxpayers also face a new filing landscape after the tax law introduced major changes. Among them are the increased standard deductions, the doubling of the child tax credit and the capping of state and local tax deduction.
These changes could make it easier to get tripped up. So, it pays read up on the new tax law, take it slow and review your return before filing.
Here are 10 mistakes to avoid.
1. Don’t miss this new credit
Tax pros worry that Americans may miss the new credit for dependents introduced by the tax law. The nonrefundable tax credit is worth up to $500 for each qualifying person and begins to phase out at $200,000 in adjusted gross income ($400,000 for joint filers).
The dependent must have made less than $4,150 in gross income last year, while you provided more than half of the person’s financial support. A dependent can be a child who is 17 or older, a relative, or a nonrelative who lived with you for the entire year.
2. Not filing a return
Some Americans aren’t required to file a federal tax return because they don’t earn enough in income. Those income thresholds vary depending on status and age. But even if you don’t need to file a tax return because of low income, do it anyway, says Kathy Pickering, executive director of H&R Block’s Tax Institute.
“You may be eligible to claim a refundable credit or you may have a refund owed to you,” Pickering says. “There’s roughly $1 billion in unclaimed refunds from people not filing a return.”
If you lost your job and claimed unemployment benefits, you also need to file a return, she says. That’s because some people don’t request for taxes to be withheld from their unemployment checks and end up owing the government. “That can get people in trouble,” she says.
3. Picking the wrong filing status
Attention single parents: You may want to choose the head of household filing status, rather than single status. Head of household comes with a larger standard deduction and often a lower tax rate. To qualify, you must:
- Be unmarried on the last day of the tax year.
- Contribute more than half of the financial support of your home.
- Have your children live with you for more than six months of the year.
For couples who are separated or going through a divorce, it’s usually better to file as married filing jointly than married filing separately, Pickering says.
“I know it can be difficult to work with a separated spouse to file taxes, but choosing married filing separately is, unfortunately, the most punitive filing status,” she says. That’s because the status disqualifies you from certain credits and deductions.
If you want to change your status after you file your taxes, you must file an amended paper return.
4. Filing without all documents
Make sure you have all your W-2s from every employer, 1099 forms that show other income and other documents to claim certain credits or deductions, such as a tuition statement for the American opportunity credit, which is for expenses from the first four years of higher education up to $2,500 per student. If you rush to file your taxes and forget a document, you will need to file an amended return.
“Those can’t be e-filed, so it’s a super pain,” says Mark Jaeger, director of tax development at TaxAct. “You must fill out the paperwork and send it in, which takes another six to eight weeks to process.”
5. Forgetting big life events
Think about your life’s highs or lows last year, such as getting married or divorced, having a baby or becoming widowed, receiving a promotion or losing your job. All these can affect your taxes.
6. Entering incorrect info
A typo can cause a lot of headaches. In some cases, the IRS will reject an electronic tax return right after it’s submitted if a Social Security number or misspelled name doesn’t match its records. You can easily correct the information and resubmit.
But if you enter the wrong bank account number for your direct deposit, the IRS won’t know until the deposit is rejected by your bank. In that case, the IRS will send a paper check, but it will be six to eight weeks later, Jaeger says.
7. Missing earned income tax credit
Every year, almost a quarter of taxpayers miss out on this valuable credit worth up to $6,431 in 2018. It’s forgotten so much that the IRS has dedicated an awareness day for the credit.
“This is a huge credit for low and middle-class taxpayers,” says Lisa Greene-Lewis, a certified public accountant and tax expert at TurboTax. “People usually think they make too much money to qualify.”
8. Paying someone to do your taxes
Forget the tax accountant if you have an easy tax return. You probably have a simple one if you:
- Take the standard deduction.
- Receive a W-2 statement rather than 1099 form for your income.
- Claim the earned income tax credit or child tax credits.
- Have limited interest and dividend income.
9. Not claiming a child
Who gets to claim the child? The correct answer can become complicated if someone other than the child’s parents is supporting the child.
For instance, a single grandparent whose grandchild lives with them may be able to claim head of household status and claim a child tax credit. In some cases, the grandparent may also qualify for the earned income tax credit.
10. Missing the other education credit
Many taxpayers may be familiar with the American opportunity credit for higher education expenses. But there’s another credit for other educational expenses. It’s the lifetime learning credit, and it’s worth up to $2,000 per tax return. “That one can cover expenses even if you’re not in a four-year degree program, such as training for a job certification,” Pickering says.
Copyright 2019, USATODAY.com, USA TODAY, Janna Herron