Whether because of the pandemic’s workforce shift to WFH or if your career trajectory has taken you there in other more intentional ways, the gig economy has exploded. Freelancing is a $1.2 trillion-dollar economy in the United States, and freelance jobs are becoming more widely accepted as a real way to earn a living.
But while earning income without a dedicated employer is more commonplace than ever, it presents financial hurdles you may not have seen coming. The income can be amazing, but does the bank consider it credible when you are applying for credit like a mortgage? You could find yourself struggling to make a housing purchase or refinance your mortgage simply by choosing to work for yourself.
What’s considered freelancing?
The term can be anything from photography or editing to copywriting or web design and financial consulting. At the core, freelancer work is when you take on contract work for companies or individuals rather than being employed by them. You are self-employed.
Financially, new freelancers will often have income with wild swings, famine or feast. When work is flowing freely, there are times when it seems income is limitless but tough times can be barely enough to make ends meet. After several years, as the business grows, income tends to stabilize.
However, the nature of the work isn’t concrete. It presents risks to the lender when you borrow money, whether that’s obtaining a credit card or car loan or buying a home. Yet, it’s possible to secure a mortgage loan, especially with a private mortgage lender like MBANC.
Be consistent
When you’re looking to purchase a home or second property, you’ll find that banks, credit unions, and private mortgage lenders alike love to see stability. The ‘feast or famine’ model often means hard choices need to be made when paying bills, and lenders don’t want to be the one that doesn’t get paid on time. When you are reporting income or paying from your business to your personal account, try to maintain consistent amounts from month to month. Not only will you begin to establish a baseline income in your brain, but it looks much better to any lender you choose.
State a healthy income
It’s tempting to optimize your taxable income to the lowest amount possible, but most lenders simply see a low-paying job that can’t service the loan amount you’re requesting, even if you stretch it over 30 years. To show you can make your monthly mortgage payment without too much stress on your DTI ratio, ensure you state a healthy income on your tax returns. Some lenders like MBANC have ways to work around it in underwriting, though.
Lower your risk profile
As a freelancer, keeping your personal risk profile in check starts with saving up a down payment for the mortgage. It is possible to get an FHA home loan with as little as 3% down plus fees, but that will increase the amount of interest you pay over the life of the loan due to a higher balance. As well, making a down payment of at least 20% will mean you don’t have to pay private mortgage insurance, saving hundreds of dollars per month.
You should also keep balances on revolving credit low, and make sure you pay them on time every time. If you’re late even a couple of times, it will affect your credit score and history.
Keep your books in order
If you’re a freelancer that’s issued 1099’s or you claim income in another way, it’s crucial that your financial statements are complete and legible. Not only does it simplify how you do business, but your company books can help you get approved when applying for a mortgage.
Rather than requiring traditional income verification like pay stubs, we can do a deep dive into personal and business bank statements to get a complete picture of your finances. For a real estate purchase, it can be the saving grace you need as a freelancer – and clean books can save your backside in an audit too!
Use a credible lender
Some lenders view freelancing as a weak financial position and will take advantage with high interest rates and self-protecting 15 year loan terms max. Mortgage brokers often add to your interest rate or tack on extra fees for their services, making a mortgage less affordable for you. By choosing a credible lender – MBANC, for example – a freelancer can get personal service for their approval and loan terms that help them succeed.
If you’re a freelancer or independent contractor, you deserve a great mortgage. Contact MBANC to inquire about options to make homeownership a reality.