Home buying has been notoriously difficult for the self-employed. For decades, freelancers, contractors, and small business owners have had a less-than-easy time getting a mortgage, facing higher rates, a more laborious application process and, in many cases, outright denial.
Fortunately, those days seem to be behind us.
With the rise of the gig economy and the sheer volume of today’s self-employed population (an estimated 3 in 10 Americans earn income via self-employment or gig work), lenders are finally making the mortgage process a bit easier for the non-9 to 5ers of the world.
Still, that doesn’t mean that as a freelancer you’ll get approved for a mortgage instantly or that you’ll get the best rates. To really up your chances of getting a home loan, it’s important to understand what lenders are worried about, what they’re looking for, and how you can make yourself the best possible candidate for a loan.
Why Do Mortgage Lenders Worry About Freelancers?
Mortgage lenders want to ensure one thing and one thing alone: that you have the funds to pay for your mortgage month after month, year after year, until the loan is fully paid off.
Freelancers present a challenge in this regard because not only do they lack a traditional annual salary, but their job is a little more tenuous. They might not have the same clients from year to year, and predicting income ahead of time — for the foreseeable future of their mortgage — can be difficult.
Historically, that’s why lenders have been iffy about lending to the self-employed. They’re worried that:
- the self-employed won’t make enough to pay their loans.
- even if they can now, there’s no way to ensure they can continue doing so in the future.
What Can Self Employed Workers Do to Increase their Odds of Being Approved for a Mortgage?
Fortunately, there are a few ways to show a lender you’re a safe bet to repay your loan. For one, you can use bank statements to show cash flow. You might not have a reliable salary every week or month, but if you can show them you always have enough cash in the bank to cover your potential mortgage payment, that can be hugely beneficial.
You can also:
- Wait until you’ve been self-employed for at least two years. Lenders will typically take your last two years of tax returns and then average the income you made. Whatever the average is, that’s your “salary” as a self-employed individual. Presumably, your income will rise the more experience you have, so waiting a few years can ensure that average is higher (and that you’ll get a better rate).
- Save up a larger down payment. Offering a bigger down payment will 1) lower your loan balance and monthly payment and 2) lessen the risk to the lender — both of which mean good things for you. If you can make it happen, try to put down at least 20 percent of your home’s purchase, so you can avoid PMI (yet another monthly cost to deal with.)
- Have some cash reserves. Having a decent savings account can give lenders the confidence that, in the event your self-employment income slides for a month or two, you’ll still have the funds to cover your mortgage payment. A good rainy day fund is important as a homeowner, too, since unforeseen issues and repairs can crop up anytime.
- Boost your credit score. The better your credit score, the better you probably manage your money — and your debts. Anything in the mid-700s and above is usually considered “excellent” for a lender, so try to get yours up there if at all possible. Pay down debts, make your payments on time, and handle any collections issues.
You can also be smart about the type of home you’re looking to purchase. Use a mortgage calculator to hone in on a safe price range to shop in. Make sure you take into account not just your potential mortgage payment, but also:
- homeowner’s insurance
- property taxes
- and just general maintenance of the home
If you come to your lender with an appropriately priced property — one your bank statements show you can comfortably cover payments on (with room to spare), then your chances of approval are much higher in the end.
Going Beyond Can Help Independent Contractors, Freelancers, and the Self-Employed
Here at Embrace Home Loans, we know the self-employed haven’t always had it easy in the home buying market — and we’re working to change that. With our new “beyond” program, freelancers, gig workers, small business owners, or anyone with a non-traditional stream of income don’t just have a shot at getting a mortgage — they have a bona fide route to do it.
Want to buy a home, but don’t have the traditional 9-to-5 many lenders are looking for? Learn more about our beyond mortgage program now, or contact an Embrace Home Loan officer to start your application.