Where would you start and what would you do?

Question

I have been reading a ton of books about investing. I know I want to buy buy and hold properties. I have a small savings but want to keep it for emergencies. I currently rent myself and would like to buy a house one day but have been self employed and write a lot off a lot so it is hard to buy. I also have some years with W-2 mixed in so that has also impacted me in the opportunity to get a traditional Mortgage loan. Mortgage lenders say I have to have 2 full years showing self-employment or 2 years of w2. I can't have a mix. Anyway, I read one forum that if you buy an investment property first then it can impact you buying your own house. Is that right?

Then I thought maybe of house hacking but living in Denver I just can't imagine being able to find a house that I can afford and not sure how to get financing being self employed. I was looking forward to having this year as all self employment so that it looks good to lenders but most recently since COVID I had to go on unemployment. I will start working again soon but now I feel that is going to impact me in getting any financing.

Either way, should I wait to invest for when I can afford a house for my family or are there ways to start investing through house hacking in Denver?

Or should I try Buy and hold first? I think I may have to do it through seller financing if I don't have too much to put down.

Any suggestions on how to get started based on this situation?

Matt M. · Answer

You'll still need to qualify for the loan with an investment property and put 25% down. Lenders are getting tough on us self employed. Tax returns, P&Ls, bank statement, reserves, etc.

I'd work on beefing up your savings right now especially since that extra $600 a week unemployment will run out soon and reevaluate early next year. I'll shoot you my lender. Her bank keeps some loans in-house, so that provides for some flexibility.

Patty Nisbet · Answer

@James Carlson

Thanks this is a big help. I do have a family so you are right. I would be up for more of a basement situation. My debt to income ratio is good and I do have a down payment but was hoping to look into down payment assistance instead to use the down payment I have for emergencies or to fix up a home a bit if I need. Yes, for a long time I chose to go under the table and wrote everything off. Now looking back that was stupid because now it is hard to qualify. This year I don't plan on writing anything off to show income but know I may need 2 years of that. I guess I look at this investment stuff that I have a goal of 2 years to start and make things right. I hope by some miracle I could start sooner. At least I know better now. I am very excited to start owning properties. I feel very late in the game I won't let that discourage me.

Thank you for the advice.

James Carlson · Answer

@Patty Nisbet

Yeah, it sucks that decisions you make in your financial interest (lowering taxes) can come back to bite you. We did the same thing early in our self-employed career as well.

I'd reach out to a few lenders to see what they say. We use a lender for some of our self-employed buyers who has definitely gotten people qualified when others could not. So don't be afraid to call a bunch and see what they say.

And it's so cliche, but also true. It's better late than never. I just had an intake call with a client who's 23 and going to do his first house hack. Wow. Seriously great for him, and Erin and I could spend all day regretting the fact that we didn't buy our first place until we were in our mid-30s. But now we have five doors, and are looking for the sixth. It's so exciting to be able to see a pathway to an easier retirement.

Circle back on BP and let us all know how it goes for you.

James Carlson · Answer

@Patty Nisbet

First off, congrats on posting on here and taking a step toward your first purchase. That's awesome. As others have said, it is tough to be self-employed, especially in a hot market like Denver. House hacking can certainly be a way to get into a place and pay a lot less per month than you probably are with your rent.

But did I read right, that you have a family? Partner and kids? If so, the traditional rent-by-the-room model probably ain't your cup of tea. I'd look at a home with a basement apartment  in one of the lesser-know-but-up-and-coming neighborhoods/areas in Denver. (I'm thinking along US-36 around Westminister, or in Denver in Barnum, Athmar Park or East Colfax.) You can still get into a SFH for $400-$450 there.

All that said, do not push too hard to "get creative" with your lending. If you don't qualify under normal guidelines, it's for a reason. It's because traditional ways of assessing your risk say that you are pushing the limits. I'm okay with clients pushing a little, but you've got to have some common sense too and know what you can afford and what you can't per month.

Don't take that as discouragement. Just know what you're getting into. Also, have you looked into down payment assistance programs, like CHFA's? They basically give you up to 3% of a down payment, but then charge a little more on the interest rate. It sounds like your biggest hurdle will be qualifying without a W2 and whether your debt-to-income is alright, but in case it's simply a lack of funds up front, this is a good option.

I wish you luck!

Craig Curelop · Answer

@Patty Nisbet - I think you will be surprised at how much you can afford! We work with a lot of people similar to you. As long as you have an income of ~$50k or more, you should be able to qualify for something in the $400k range and that's really all you need.

If you are open to the rent by the room strategy, we also work closely with a lender that has a program specifically for this strategy. You are able to use a signed lease to bolster your "Debt-to-income" ratio so that you can afford more.

Where would you start and what would you do?

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