Berkshire Hathaway CNY Realty

Mortgage Qualifications for Freelancers

by Robin Latham 10/05/2019

While working from home and making your own schedule, either freelance or as a contract worker, allows for a particular type of freedom and control of schedules, a dress codes, income limitations, and your life, when it comes to qualifying for a mortgage, your 1099-MISC status comes with some drawbacks.

The so-called “gig-economy” places workers squarely in the “self-employed” column with its tax breaks that reduce the bottom line, letting you keep more of the money you work for. Unfortunately, the mortgage banking industry has not completely caught up to the new reality. The challenge is differing between “provable” income while retaining the tax advantages of self-employment.

Conventional Mortgage Lenders

Typically, the mortgage industry bases your credit-worthiness on provable income. Underwriters (the folks tasked with determining your creditworthiness) use W-2 forms and tax returns to qualify homebuyers for a conventional loan. Without these standard forms, proving your income is difficult for many self-employed would-be homeowners.

Conventional lenders follow a prescribed formula to prove income and credit-worthiness, so many mortgage underwriters merely look at your after-tax and post-deduction income. The result for 1099 workers is a lower provable income than the reality of most entrepreneurs or self-employed workers situation. Certain expenses such as one-time investments in equipment or product, and some depletions or deductions for your existing home, add back into your income on paper, but qualifying with 1099 income requires extra effort on your part. 

Unconventional Mortgage Lenders

Conventional lenders offer conventional loans. These are loans qualified for selling on to FreddieMac or FannieMae. Alternative loans—those provided by smaller lenders and investors that hope to realize a better return than a conventional loan offers—might be a more likely option for the self-employed. These loans are not without some added risk. To make them attractive to investors, the interest rate on non-conforming loans typically is higher, and down-payment requirements might be higher as well. Some alternative mortgages with lower interest rates or lower down-payments might be available to self-employed borrowers with exceptionally great credit or an extensive portfolio. 

Qualifying

Plan two years in advance: position yourself to qualify for a loan. Once you know where you stand, you can work to move into better condition to qualify. Organize your books and keep accurate financial records. You need to prove your income, so use an invoicing system to show receivables. Often, lenders want to look at two or more years of both tax returns and bank statements. They want to see an average over 24 months to determine your annual income and your ability to pay your mortgage. Keep profit and loss statements, expense reports and a balance sheet. If your accounting is complicated, get professional help. Utilizing a professional bookkeeper and CPA might just save you money and show you have solid business intent.

Save up a more substantial down payment: The more you put down, the less you need to borrow. Showing consistent savings also proves your ability to set money aside and prioritize savings and spending.

Improve your credit score: Sometimes it seems your credit score doesn’t make sense. After all, the calculations and formulas used remain a mystery. You can make significant strides in increasing your score though, by paying attention to two things: payment history and credit utilization. 

  • Payment history is just what it sounds like—the history of how you pay your bills. Avoid paying late and try to pay early. Your payment history makes up more than thirty-three percent of your total score.
  • Credit utilization—the ration of how much credit you have available to how much you’ve used—is another large chunk of your score. If you have a credit card with $2500 available, and you’ve only used $250 (on average) you are using just ten percent of your available credit. On the other hand, if your card only has $250 available and you’ve used just $125 you have used half of the available credit. The higher the percent of your combined usage to your combined credit (all credit cards, personal loans, vehicle loans, etc.) the lower your score.
  • The remaining parts of your credit score relate to the length of time you’ve had credit, how many accounts are new, how often you apply for credit and a mix of other bits of information. To help this area, avoid applying for credit cards, car loans or personal loans (furniture, appliances, etc.) for the two years leading up to when you apply for a mortgage. When you pay off a credit card, cut up the card or put it away, but avoid closing the account. Older accounts have a higher point value compared to newer ones, even if you aren’t currently using them.

Start now working on your credit and establishing the best accounting practices to prove your income. Speak with a mortgage lender for information on what it takes to pre-qualify for a loan in your situation.

About the Author
Author

Robin Latham

My career in real estate was born from the desire to help people achieve the dream of home ownership and the financial benefits that smart home ownership provides.  It is my goal to provide personal service and attention to my clients through all the stages of home ownership and stages of life…from the first home to the final home and every step in between.

I truly believe in home ownership for all who desire this “American Dream”. Long before the first home purchase I will help you determine the best path to home ownership for your individual situation.  I will work diligently on your behalf to help you secure your first “perfect for YOU home”.

It is my hope that I can continue to be a resource to my past clients, many of which I call friends after sharing the first journey into home ownership together.  As a resource, I can provide you up to date market information about your home to help you make sound improvement and financial decisions regarding your home and the equity that you are building.

As a seller I understand the journey that you have taken in your home and will seek to understand your personal situation and needs as I prepare a personalized plan for the sale of your home.  Through my community involvement,dedicated efforts and lists of prospective buyers I will identify the right buyer for your home, and through targeted marketing match your home to that buyer; all with the goal of securing the best price possible in the shortest amount of time.

As you move through the life stages I will always be available to assist you with the same personal care and attention that you will come to expect from me. It will be my pleasure to take the journey with you from the first set of keys to the last.