• Steph McGuirt

Why your bookkeeping matters if you’re self-employed and buying a home

Updated: 4 days ago

If you’re self-employed and buying a home is on your goals list, then you should know that your bookkeeping and the purchase of your new house go hand-in-hand.

“How in the whaaaat?” you ask...

Well, you see… underwriters want to know EVERYTHING but your blood type (basically).

They’ll, at minimum, want to see your business financial statements, which include your Profit & Loss and, possibly, your Balance Sheet. And, they’ll want to see a history of these reports - so they may, for example, ask for the past 2 years of financial reports.

They’re mostly looking at profit, maybe even revenue trends and, most certainly, accuracy and alignment with your tax returns.

When we bought our first home, this is what I had to provide. The experience may not be exact for you... but I’ll bet, it’ll be pretty similar.

Buying a home is stressful enough (honestly, I’ve never met a person who wasn’t pretty tense throughout the process). Not only is it likely the most significant personal investment you’ll ever make, but it’s moving - and planning for and doing that is never fun no matter how much beer and pizza you throw at it.

My point is - you’re going to want to make this experience as stress-free and straightforward as possible because who knows what wrenches will get thrown in there along the way. If you take the time now to prepare, you’ll be ready for anything.

If your bookkeeping system isn’t set up or you’ve found yourself in catch up mode, then it will have an impact when you’re ready to buy the house you’ve been eyeing. The underwriting team for your mortgage will want to see your financial reports, and if you can’t give it to them right away - you’re facing a risk of losing the house you want.

Let’s make sure that this does not happen to you...

Here are 3 things to consider when planning to purchase a home as a small business owner:

  1. Have historical financial data ready to go. In my case, this was 2 years of my Profit & Loss reports - and I’m betting it would be similar - if not precisely that, for you. These reports should make sense and align with the tax returns you’ll also be asked to provide.

  2. Be prepared to answer questions about your business. A year before buying our home, we moved from Texas to Colorado... underwriting wanted to know how this impacted the business. Since we’ve always kept a consistent bookkeeping system and review monthly for accuracy, I was able to pull a Profit & Loss comparison report looking at the current and previous year. I customized the report to show me the percent change and was then able to present to underwriting that our income had increased by 10.6% since we moved. They were impressed! This is an example of where you can easily leverage the ability to drill down into your numbers and get a deeper insight into your financial situation.

  3. Review your numbers (at least) monthly. Set a monthly bookkeeping date with yourself and put it as a recurring event on your calendar - and stick to it. I know it doesn’t sound like the most romantic date ever - but, trust me, it will pay off to check in with your numbers regularly. When your bookkeeping date rolls around, make yourself a fantastic cup of coffee or pour yourself a glass of wine… get your favorite playlist going, and dig in. Make it fun and enjoy getting to know your numbers!

Bonus Tip from Luke Frye of Timber Tax Accounting: Ask your CPA about providing you with a Comfort Letter. This letter is essentially a verification of your self-employment status as well as earnings for your lender to have on record. Since your CPA has reviewed your financial documents and filed your tax returns, most are able and willing to provide a comfort letter to help in securing your home loan.

Getting started on your home-buying journey as far ahead as possible is essential. Planning for this stage in your life is an excellent example of where your business absolutely does have an impact on your personal goals. This is why it’s so critical not to use your personal bank account as your bookkeeping system, and to really get to know the numbers in your business - this way you’re confident and ready when the time comes to talk financials.

When we bought our home, it was stressful because it happened incredibly fast. People were buying left and right in our area, so we had to be ready to go. If I didn’t have the correct self-employment records prepared, the whole thing could’ve fallen through - it’s all about being prepared, staying consistent, and knowing your numbers.

If you’re planning to buy a home and are needing to get your financials up to date, reach out and let’s chat - we’re here to help make life easier for you and are so ready to cheer you on when you’ve got the keys in your hands!

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