One of the main things you need in order to qualify for a mortgage is an income to support the payments—you’ll need documents showing this income when you try to get pre-approved. But self-employed and freelance workers don’t always have that option. Without work stubs, what can they do?
“In general, the qualifying criteria are the same for a self-employed borrower as it would be for a wage earner,” says Jesse Gonzalez, a mortgage broker with North Bay Capital in Santa Rosa, Calif. “The only real difference is going to be in the type of income documents that you’re going to collect.” You’ll need to provide two years of tax returns, including your Schedule C, as well as bank statements, to start. Read on for more tips on buying a home as a freelance or self-employed worker.
Proving Your Income
Not only will you need to prove your income is stable, your tax returns will need to as well. If this poses an issue, you may consider applying for loans for self-employed workers, which use bank statements as proof of income.
Besides saving up for a down payment and trying to improve your credit—you can check two of your scores on Credit.com to see where you stand—self-employed workers should keep good records and mind how they structure their taxes in the year or two leading up to the purchase. “Self-employed borrowers write off the majority of their income, so they pay less in income taxes,” Gonzalez explains. “When you write off a majority of your expenses, then you have less income to qualify for a mortgage.”
It’s wise, then, to speak with an accountant before filing your taxes. Some things can be added to income even after you’ve written them off for the sake of a mortgage, Gonzalez says. But freelancers should be prepared to make tradeoffs. One option is to get pre-qualified for a mortgage, which can turn up information the lender can use to determine if you’ll need one or two years of income documentation, he says.
Besides proving you have income, you’ll also need to show its consistency. “Newly self-employed people are typically difficult to underwrite,” Gonzalez says, so it’s best to have a year or two under your belt before applying.
Finally, if you’re shopping for homes with a wage earner, see if their income alone can qualify. He may not need to earn much, although the loan may only a cover home beneath your means since your income’s left out. However you decide to go through with the process, remember to bring the right paperwork and take time to shop around. You want to find the best deal for you.
More on Credit Reports & Credit Scores:
- The Credit.com Credit Reports Learning Center
- What’s a Good Credit Score?
- How to Get Your Free Annual Credit Report