What Freelancers Need to Know About Getting a Mortgage
Getting a mortgage and looking for a new home is always a difficult process, especially when you’re self-employed or tend to work on a contract-to-contract basis. Luckily, your search for a mortgage doesn’t have to become a separate ordeal as long as you utilize this checklist to get your ducks in a row before speaking with a mortgage lender.
Get your tax returns ready
The first thing you’ll want to do when searching for a new home as someone who is self-employed is to round up your last two years of tax returns. While someone with a more traditional form of employment would typically require just the last two year’s worth of W2’s, folks who are self-employed are viewed as more of a financial risk by mortgage lenders. These documents will serve to demonstrate that you have a history of steady and stable income that will allow you to afford the mortgage payments on a home not only right away but also for the years to come.
After you provide your mortgage lender with these documents they will use your average income from both years to get a sense of how much money you bring in each year. This is the number that they will use to determine how much house you’re able to afford in your real estate market so if there’s a significant difference in the amount of money you’ve earned in one of the past couple of years be sure to explain why this happened (whether it be due to illness/injury, maternity leave, some other life change, etc.) so that they know this does not reflect how much you typically earn in a year. If you find yourself in this situation, also be prepared to provide additional tax documents to support your claim that this is not representative of normal circumstances.
In addition to these tax returns, small business owners could also be required to provide their mortgage broker with a 1099 form, or a profit and loss (P&L) statement. This is to demonstrate that your business is profitable enough to be able to comfortably provide for your mortgage payments. You may be exempt from this, however, if you have been in business for five or more years and your past two tax returns show that your income has increased year after year.
If you are unable to show your income on your tax returns there are alternative ways of proving your income through bank statement loans – which count your deposits as income.
Make sure your credit is good
Everyone knows that having good credit is one of the most important factors in qualifying for a mortgage but this is especially true for those who are self-employed. If you have yet to do so already, apply for a credit card and start using that for your day to day purchases. Be sure to not spend beyond your means as you’ll need to pay the credit card debt that you accrue at the end of the month in order to build credit.
Also be sure not to use your personal credit card(s) to pay for any business expenses as this only serves to increase your personal debt, too much of which can hurt your chances of qualifying for a mortgage.
Pay off as much of your debt as possible
This is a good idea regardless of whether or you’re planning on buying a house but will become especially important when you’re applying for a mortgage as a freelancer in the gig-economy. Because your income isn’t considered to be as stable as someone more traditionally employed, having little to no debt would go a long way in proving that you’re a safe bet. You shouldn’t deplete your savings in your efforts to do this but the more you can chip away at things like credit card debt, student loans, or car loans, the better.
Limit your tax deductions
While it may seem appealing to write off as many of your expenses as possible on your taxes, try to reign in these write-offs as much as possible. This is because each expenditure that you write off actually serves to decrease your income (at least on paper). Before you quit cold turkey on tax deductions though, be sure to meet with both a mortgage officer and your tax preparer so that you can explain to them what size house you’re looking to purchase and you can learn how much income you’ll need to demonstrate in order to qualify for the necessary mortgage.
Go the extra mile
You may want to take the time to find some good articles that explain what exactly it is that you do (and how to make money) and send these to mortgage lenders. While it’s not necessary by any means, it could prove helpful to brokers, especially if you’re in a less than traditional field. “You need to prove that your past two years are normal. And that the likelihood of continuance is there,” said Whitney Fite, senior vice president of strategic accounts for Angel Oak Home Loans. “Be prepared to supply a lot of documentation for that, such as articles about your industry. Things of that nature go a long way. The mortgage lender is not going to make a decision based on it, but it will help create a level of comfort.”
Don’t stress out too much
While searching for a mortgage, especially as someone who is self-employed, is never easy, don’t freak out. The most important thing you can do is to prove to lenders that you have a stable, predictable income that provides you with enough money to afford the type of house you’re looking for. Chances are pretty good that if you’re preparing to speak with a mortgage broker then you’ve already determined that you meet those criteria so just follow this guideline, sit down with a financial advisor, and you’ll be in a new home before you know it.
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