Thursday, September 10, 2020 / by Teresa Dipeso
Being a freelancer, contract worker, gig worker, or anyone self-employed is more common and popular than ever right now. There are downsides, such as the lack of benefits like health insurance. At the same time, there are more upsides for many professionals who choose to work this way.
Upsides include freedom and flexibility to make your own schedule, unlimited earning potential, and the ability to have the work-life balance that allows you to create your own lifestyle.
There is an issue that can arise if you’re a freelancer or contractor, though.
How do you get a mortgage?
When you apply for a mortgage as a traditional employee, you’ll probably show your proof of income through your job, but it can be a bit trickier if you don’t have a traditional employer. You’re also going to face more scrutiny from lenders.
Keep Up with Relevant Documents
Over the years, it’s easy to be disorganized as far as how you keep up with your earnings and expenditures, but come time to apply for a mortgage that can be problematic.
As a freelancer or anyone who’s self-employed, it’s normal that your income is going to fluctuate, and you’ll have up and down periods.
What you want to be able to show a lender is your long-term earning average.
You should be able to calm the fears of your lender by showing them at least several years’ worth of documents highlighting your earnings.
You need to be able to demonstrate a pattern of earning. If you aren’t able to do that just yet, you might have to hold off on buying a home.
Even better than showing steady earnings is being able to show upward trends.
Another note—if you’re self-employed, you likely try to write off as many of your business expenses as you can at tax time. This is understandable, but you also want to show as high an income as possible, so if you’re thinking about buying a home anytime in the future, keep that in mind with your deductions.
Be prepared to show at least two years of tax returns, which will likely be your 1099s instead of your W2s.
Beyond your tax returns, you may want to be able to show your bank statements, and any profit and loss statements. You can also provide letters from clients showing that you have a stable relationship.
Your income is calculated differently if you’re a freelancer. Your lender will calculate an average monthly income by dividing the past two years of your adjusted gross income by 24.
Save As Much As You Can
You should aim to save at least 20% of the purchase price of a home because this will let you avoid paying for private mortgage insurance. You also want to be able to show your reliability as a borrower, so with that in mind, the bigger the downpayment you can make, the better.
Clean Up Your Finances
You can face more headwinds if you’re trying to buy a home and you’re self-employed in any capacity. You are inevitably going to be held to a higher financial standard, so prepare yourself for that.
You should aim to get your credit score up to at least 740, and the higher, the better.
Start working toward paying off debt, including your credit cards. Credit utilization is a big component of your score and also the willingness of a lender to offer you a mortgage. Try to have the amount of credit you’re using below 30%.
Before you ever start trying to apply for a home loan, look at your credit report.
This will allow you to see where you need to make improvements, and also spot any potential errors. There are errors on credit reports more often than we think.
Don’t open any new accounts or lines of credit before you’re going to start applying for home loans, because that’s going to impact your credit score negatively.
Finally, before you start the mortgage application process, separate your business and personal bank accounts. You shouldn’t use a personal bank account for anything related to your business.
As a freelancer, getting a mortgage is certainly possible but also more challenging. The more you can prepare yourself for that, the better off you’re likely to be in the process.
courtesy of Ashley Sutphin at realtytimes.com