If you’re self-employed, or earning at least some of your money through contract or gig work, you might wonder if you’ll be able to get a mortgage loan.
If a gig is just a side income stream, there’s no issue. Under the current rules, borrowers who apply for a conventional mortgage based on W2 income or retirement income aren’t asked to show their earnings from the side gig.
But what if gig work is a large portion or all of your income? Prepare to get a lot of questions from the gatekeepers.
Get the Right Mortgage Expert.
In the face of any indication that your income stream is precarious, underwriters may hesitate. That’s when your mortgage specialist will ask you for more proof, more paperwork.
Find an energetic mortgage specialist — someone who’s in your corner, ready to navigate the underwriter’s rules and assumptions. Wondering where to look? Talk with local homeowners you know who are engaged in nontraditional work: gig workers, part-time employees, entrepreneurs. Who was their mortgage specialist? Or what realtor did they use? That agent will know who assisted with the successful mortgage.
Show a History of Savings and Financial Resilience.
Mortgage servicers accept loan applications face-to-face, by phone, or through online portals. Your income and balances in credit, savings and investment accounts, your work history, your credit profile… All of these are basic factors for meeting the underwriting guidelines. If you’re a business owner and self-employed, get ready to show your mortgage specialist the proof of your business formation with the state, recent tax returns and the attached schedules, and your income and spending data.
When you really want a house, it’s tempting to raid everything you’ve got to make the underwriter happy, but approval doesn’t work that way. Lenders won’t let you deplete all your savings to make your down payment. In their eyes, that’s another risk.
Nor does it help to go to supportive friends and family members for financial assistance — unless someone is prepared to serve as your co-borrower on the loan. If your bank accounts show unusually large recent deposits, you’ll likely need to explain where the cash injection came from. If a source of income isn’t regular, it won’t help you qualify. Industry guidelines require the lender to rely on stable and consistent income, not unusual infusions of cash.
Pro tip: Income fluctuates for many businesses. Had a particularly low-income year? Prepare your mortgage specialist to show the underwriters several years of tax returns. You might also ask for a statement from your accountant to attest to the health of your business. (Under normal office policies, your accountant might turn down a request for such a letter if you were not a client during the time you’re looking back over.)
Ask About Mortgages Tailored to the Self-Employed.
Why is two years the yardstick? The Dodd-Frank Wall Street Reform and Consumer Protection (Dodd-Frank) Act codified the ability to repay rule. For the borrower’s protection, it is against the law for a lender to approve a borrower who will not have the resources to pay the loan back. In practical terms, lenders must make a reasonable, good-faith decision that the borrower can pay back any loan secured by a home. The basic factors in this are:
- Verifying income. This can be done in a variety of ways, but usually relies on two years of tax returns.
- Determining debt-to-income ratio. Whether you run your own business or do work for hire, how much you make versus how much you spend is a pivotal ratio. Lenders divide monthly debt by gross monthly income. The ratio should be no more than 43%, unless the lender has solid reasons to be sure you’ll be able to faithfully repay your mortgage loan.
Here’s the good news. Contract workers can ask Freddie Mac and Fannie Mae, the government-backed companies that buy most conventional mortgages, to apply automated underwriting for self-employed applicants. The automation technology scans tax returns for income that could qualify the borrower. Neither Fannie nor Freddie will hold the lender responsible for income errors found later if the approval is based on the automation.
Moreover, Fannie Mae will accept self-employed borrowers with irregular pay or occasional business draws, even if their businesses don’t yet have two years of federal tax returns. So, if you are self-employed or do work for hire on a contract basis, but don’t have the continuous two years of pay from one business source, you have options.
To strengthen your application, your mortgage specialist could suggest you write up a statement on how your current work continues the trajectory of the work you did in past years. It’s helpful to show a continuous income pattern in related tasks, even though you need not show a steady, two-year self-employment history. Fannie Mae can approve borrowers who show one full year of successful self-employment after prior work in the same field.
Pro tip: Be cautious about writing off income in your tax return if you aim to buy a home. You’ll want to show more income, not less, when applying for a mortgage. Some deductions, such as depreciation, are fine. Underwriters will take write-offs that aren’t actual expenses and add them back into your income.
Your Business Survived a Pandemic? Prepare to Offer Additional Documentation.
Just as things were getting a lot better for home-hunting gig workers, the virus turned up. People in a variety of occupations, from cleaners to café owners, from Lyft drivers to travel agents, coaches and personal trainers, mechanics and dog walkers, non-essential retail workers… So many have been set back by the effects of the virus. Some people have been displaced from their organizations and are starting up independent businesses.
In light of the financial turmoil connected with the pandemic, lenders now expect extra documents from these self-employed applicants, such as:
- Proof that their sources of income are still viable — for example, current licensing documents, and proof of recent income through gross receipts or sales.
- A signed year-to-date profit-and-loss statement to prove and attest that the last tax return is still relevant. The information must cover the most recent month preceding the loan application and be submitted within 60 calendar days of the promissory note date.
Your application file will need to contain a persuasive written analysis showing you qualify for your home loan based on reliable, stable income. What is the practical effect of this? If you qualify for the loan yet your income has suffered in the shutdowns, you’re not going to qualify to borrow as much.
Pro tip: Facing a financial emergency? The U.S. Small Business Administration offers low-interest loans to help small business owners recover from declared disasters. Use official .gov websites and those you know are trustworthy. Beware of disaster relief scams, which abound online.
Getting Your Mortgage Loan Is Possible, and Now Might be the Best Time.
Getting a mortgage as a gig worker continues to take a special kind of stamina. But people are making livings from gig work and independent business ownership, and many of these people want to buy homes. The mortgage industry is coming to understand this. Getting a loan is possible, and the best way to win at the game is to have an excellent mortgage expert working on your behalf.
Once you do buy your home, you can set it up as your place of business, and be eligible to deduct business expenses and the value of the space in your house used regularly and exclusively for business. In these times especially, the journey to homeownership can be rugged yet rewarding.
Resources
Kenneth R. Harney, If You’re Self-Employed or a ‘Gig’ Worker, Getting a Mortgage Just Got Easier, Washington Post (Mar. 13, 2019).
Gina Pogol, Self-Employed Mortgage Borrower? Here Are the Rules, The Mortgage Reports (Sep. 27, 2019).
Photo credit: Frank McKenna, via Unsplash.