• Steph McGuirt

Why Your Bookkeeping Matters if You’re Self-Employed and Buying a Home

Updated: Jul 10

Are you self-employed and buying a home?

If yes, you should know that your bookkeeping and the purchase of your new house go hand-in-hand.

Underwriters are curious folks. They want to know a lot about your finances and tax filings.

And if you're self-employed, they may ask to see your business financial statements, which include your Profit & Loss and, possibly, your Balance Sheet. They also like to see a history of these reports, which means they may ask for the past 2 years or more of financial reports.

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

Your lender looks at your business's profit. Perhaps even revenue trends as well as accuracy and alignment with your tax returns.

Not only is buying a home likely the most significant personal investment you’ll ever make, you're going to have to move. And no matter how much pizza and beer you throw at the moving experience, it's no one's idea of fun and relaxation.

You want to make this experience hassle-free and straightforward. Because who knows what might get thrown into the mix along the way.

If you take the time to prepare now, you're getting ahead of the game.

Not having a bookkeeping system today has an impact when you’re ready to buy the house you want. The underwriting team for your mortgage expects that your financial information is ready to go.

If you can’t get them your numbers right away, you face the risk of losing the house you want to the next person in line.

We want to make sure this doesn't happen to you.

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

- Have your historical financial data at hand. When I bought a home, I sent the underwriter 2 years of Profit & Loss reports. These reports should make sense and clearly explain your revenue, cost of goods sold, operating costs, and profit. They should also match your tax returns for the same years.

- Be ready to answer questions about your business. A year before buying my house, I moved from another state. The underwriter wanted to know the impact this move had on business. Thanks to a consistent bookkeeping system, I could pull a Profit & Loss comparison report looking at the current and previous year. I customized the report to show the percent change in revenue. This way, I could show the underwriter that revenue had increased by 10.6% since my move. This is an example of how you can quickly dig into your numbers and get an insight that helps to keep the process going in a positive direction.

- Review your numbers (at least) monthly. Set a monthly bookkeeping date with yourself. You can put it as a recurring event on your calendar or as a monthly task in your project management tool. It pays to check in with your numbers regularly. This way you're able to catch errors as they happen and fix them before it becomes a large, more time-consuming issue to tackle down the line.

Luke Frye of Timber Tax Accounting says, "Ask your CPA about providing you with a Comfort Letter. This letter is essentially a verification of your self-employment status and 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."

Get started on your home-buying journey as far ahead as possible.

Planning for this stage in your life is an excellent example of where your business has a big impact on your personal goals.

This is also why it's critical not to rely on your personal bank account as your bookkeeping system. Instead, get to know the numbers in your business by using an accounting software—this way you’re confident and ready when the time comes to talk financials.

Need to get your bookkeeping up to date?

Reach out and let's chat to see how we can help you get there fast.

Be sure to grab your free Discovery Call Prep Guide below. Make the most of your next call with a bookkeeper.

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