Last night, we sat down with our loan officer to talk about buying our first house in Portland. Those words are so exciting … and a little scary at the same time. I wrote up a little post on our personal blog, but then it just dawned on me that this is a perfect place to share our experience as well. Basically, since starting my business, I knew I wanted to do it all legally (taxes & such), and I am very glad that I did. Seriously you guys … SO GLAD, and here’s why:
My hubby (my amazing, loving, talented husband) is serious about sticking to his goals. In 2003, he started college on the path to become an architect. Since then, he’s been working on reaching that title. He’s completed undergrad studies, grad school, years of internship, and now he’s gaining his credits to be able to take his tests to get licensed. Ten years into his journey, he’s almost done!! All of this training & school means he hasn’t had a lot of time for work. Well, thankfully, after moving to Portland, he landed a position with a firm in town, and he’s rocking those khakis (yeah, he’s sexy in his skinny khakis)!!
Me … well, I started working for myself in 2009, but didn’t start recording income (because there wasn’t any) until 2010. Since then, my business has grown and now I am a full time self-employed creative. Together, Jim (that charming husband I was telling you about) and I make, what we consider, a comfortable amount of money, and we’ve been saving most of it to buy our house.
Imagine my surprise when our loan officer told me that my (very real) salary might not be considered by the lender. We each make enough to live, but without the other being considered on the application, there’s no way we’d be able to be approved. After our meeting, we were assured we’d be in good standing for pre-approval (thank goodness) … Here were his concerns:
My self-employed status: I am sure most lenders hear, “I don’t really have a job … ya know, I work at home … and make enough money for my Netflix subscription”, when you tell them you’re self-employed. It’s all about proving your income. Like I’ve mentioned before, being self-employed does not mean you’re just filling the financial gaps. Be proud to report how much you’re earning.
Proving my income: As soon as this guy knew I worked for myself, he was sure to explain how important proof of income is. Thankfully, because I use Freshbooks for my accounting, I have a live/accurate report of my income for any given time. I can also show a forecast. They want to see tax returns too. We decided to hold off another month before going through the application process so we would have our 2012 taxes considered (believe me, 2011 & 2012 were much better for us than 2010 & 2011, so we definitely want to go that route).
Is it legal?: In order to prove your income (and have it shown on your taxes), you will have needed to establish yourself as a real business. This means setting up your business with the state & IRS. This is so important … I have a lot of friends who are self-employed that take all payments under the table, and never report the income. That’s great if you never plan on buying a house or a car … but lenders want to see that you’re running a legitimate business, and making a profit. And, I am joking about it being ‘great’. It’s totally illegal to skip out on taxes, and even though I hate sending thousands and thousands each year to the government, there’s a sense of pride that I’m doing it the right way. As soon as we moved to Portland, we worked with Josh of CreateLegal to update our business in Oregon. He set everything up for us (sooo helpful), and we took our packet to the bank to setup our accounts. It felt awesome to be official.
My best advice when running your business is to do it right from the beginning. Here’s what I’ve done:
Keep up with your expenses: I’ve waited to input expenses for months before … 2012 was the year it all changed, and I am so happy. Yesterday, I sat my profit-to-expense report in front of the lender, and he could clearly see exactly how much I had made, and how much could be contributed towards a mortgage.
Report everything: If your aunt or a client-friend writes you a check (to you instead of your business), it’s so tempting to deposit it into your personal account. BUT, if it’s for business, deposit & report it accordingly. By skipping out on reporting income, you’re really just hurting yourself in the long run. Lenders will combine your last 2 years of income & take the average … the first few years of growing your business are so very important. Even if you’re not making much, be sure to claim it all.
Do as much out-of-pocket as you can: I was very tempted to take out a small business loan when I first started my business. Looking back, I realize I didn’t need it, and I am so happy I don’t have that debt on the table. As you’re upgrading your equipment, it’s a much better idea to plan ahead. Pull a little from each check that comes into your business and put it into a savings account. Take this into consideration … If you want a new iMac for your studio, $2,000 might seem like a big investment (it is), but think about it in terms of saving $200 from each of your next 10 sessions or projects. Keep it stored away, and in no time, you can go out & purchase it outright … you’ll avoid a 15-25% interest rate you’d incur by financing it. I talk more about savings & planning a bit here.
Wait to take the leap: Personally, I was soooo over my day job in 2010. I dreamed of leaving & never coming back. I dreamed of all of the extra time I’d have for my business if I wasn’t working for the biggest d-bag ever. As soon as I left that job (errrr … got fired a week before I was going to put in my 2-weeks notice), I realized I had made the leap a little too soon. I quietly worked a serving job for the next year & saved my money (note: I never talked about that on this blog … not that I was lying, but I really wanted my potential clients to know my heart was in it 100% and not to doubt my commitment). In early 2011, I was able to leave my part-time job and focus 100% on my own business. After my second attempt at going full-time, I finally felt that free feeling I was hoping for the first time. 2012 is my first full year without a W2, and it felt kind of like a “BOOYAH” moment to slap that down in a bank. I’m just glad I didn’t yell “Suck it!” when he asked for our proof of income. It really is awesome to work for yourself, but it’s also to be sure you’re 100% ready before making the leap. I am realizing now that I could probably write a full post about this subject (noted, and coming soon).
So … the next step on our end is applying for our loan and starting to house hunt!!!!!! Portland is an insane market, but I guess it’s just par for the course of this crazy life we chose to live.
Also, all of this is so nerve-wracking. Income? Taxes? Houses? Being an adult? Wowza … when did we get so mature? Pssshhhh.