Getting a mortgage as a freelancer: 5 tips for hassle-free home-buying
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So you’ve built up your freelancing business and are ready to reap some of the benefits of your success in the form of launching a house hunt. If you’re like me, you might have even gotten to the point of setting up a few walk-throughs and falling in love with your dream home. Then, out of nowhere, the mortgage rug is pulled out from under you because of your business’s status as a sole proprietorship.
Before you panic, it’s not impossible to get a mortgage as a freelancer. But there are a few extra hoops you might have to jump through to get there.
Here are the five biggest pieces of advice I’ve picked up along the way.
You’ll Need Two Years of Tax Returns
If you want the earnings on your 1099 forms to count toward the amount of money that a mortgage broker will lend you, you’re going to need at least two years of tax returns showing how much income you generate from your sole proprietorship. The idea is that your broker wants to make sure you’ll be able to afford the same mortgage payment next year as you might be able to this year, which is why freelance income can look so scary to banks and lenders.
One way around this is to find a cosigner for your loan, in which case you shouldn’t have to produce as much proof of income as you’ll need on your own. Just make sure that your own personal numbers add up when figuring out how much house you can afford, because your pre-approval will be based on your cosigner's income, not yours.
Ask about Averaging Your Yearly Income
Once you have two years of tax returns behind you, make sure you’re clear on which numbers your lender will be using to generate your pre-approval. Typically, mortgage brokers will take an average of the income you have on file for both (or more) years. However, some may use only the lowest number, especially if it happens to be the most recent.
If there’s a specific reason why one tax return might be significantly lower than the other, explain this to your mortgage broker. For example, if you took time off for maternity leave or for another major life event, your income might not accurately reflect how much money you make in a typical year.
The More You Have Saved, the Better
Stockpiling for a significant down-payment on a home is a good rule of thumb for anyone, but it can be especially helpful if you’re a freelancer. Banks are worried about loaning money to people with an “unstable” source of income, but they may be much more willing to excuse your fluctuating earnings if you show up with a hefty down-payment.
This will also lower the amount of money you need to borrow, so marathon-saving while you’re waiting for that second tax return can really pay off in the long run.
Pay Attention to Your Credit Score
Having an outstanding credit score can always be helpful when trying to get a loan, so it can really come in handy if you’re a freelancer trying to prove financial stability to a lender. While having average or even not-so-great credit isn’t the end-all-be-all of getting a mortgage as a freelancer, it can be a setback.
If you’re still in the early stages of your house hunt, try to build up your credit as much as possible before seeking a loan. There are a number of ways you can go about doing this, including applying for a credit card (or an additional credit card if you already have one) or becoming an authorized user on someone else’s account.
Tax Write-Offs Can Come Back to Haunt You
For a freelancer, tax deductions can be both a blessing and a curse. Financially, there are some obvious benefits to writing off business expenses like software subscriptions, office supplies and even part of your monthly rent if you have a home office. When it comes to getting a mortgage, on the other hand, the more tax deductions you have, the less income you have on paper.
While you certainly don’t want to eliminate all tax write-offs, it can be smart to rein in your deductions if they’re starting to take a significant chunk out of your net earnings.
Buying a home can be a daunting task, no matter what your job is, let alone if you’re trying to make a livable wage as a freelancer and prove your success to the bank. The good news is that getting a mortgage doesn’t have to be as complicated of a process as it might seem, provided you do a little extra leg-work at the beginning to make sure you have all your financial ducks in a row.
Gabrielle Pastorek is a freelance and creative writer who holds her MFA from the University of Pittsburgh, as well as BAs in English and French from Ohio University. When not writing, she spends time with her horse, Lucy. She lives, writes, and rides in Pittsburgh, PA.