In today’s work universe, we are a nation of independent employees, and it’s the “age of the freelancer,” Fortune magazine has declared.
The self-employed workforce should total 40% of the whole by 2020, says another study—that’s 60 million people!
Are you a self-employed home buyer needing a mortgage? Loans can be tricky to get when something as straight-forward-seeming as what you earned last year gets bogged down in a pile of pay stubs from various clients.
Self-Employed Home Buyer Blues
Julie and Michael Kurtz can’t prove it, but they’re pretty sure their independent status delayed their expected home loan approval by a few weeks this summer—which called into question whether they could close on a new condo in Chicago.
Julia is a freelance editor of technical journals, and Michael is an attorney. He also referees high school and college football; she has a shop on the handmade Web portal, Etsy, as well.
Their story has a happy ending, albeit a stressful one—they ended up getting the keys a few days later than originally planned (which also caused some hiccups for the sellers), due to last-minute requests from the bank.
“It would have been better if we’d worked with a loan company where we could have had a personal relationship with the loan officer or broker,” Julia says.
Self-Employed Home Buyer Challenges
Quicken Loans Vice President Bill Banfield notes the unexpected paperwork requests can trip up the prospective self-employed home buyer.
“The challenge for those who are self-employed can be in verifying the legitimacy and stability of their income,” Banfield says.
And new regulations enacted earlier this year mean that the self-employed face even closer scrutiny, according to the New York Times: “Borrowers who have been self-employed for less than two years will find it difficult if not impossible to obtain financing.”
Self-Employed Home Buyer Sticking Points
These are the details that a self-employed home buyer needs to prepare for when seeking a mortgage.
Debt-to-income ratios. If your business carries debt and you are the sole proprietor, that could impact how much of a personal loan a bank will extend.
Earnings. Freelancers especially often have business deductions that come out of their overall pay. Banfield uses the example of someone who earned $100,000 last year but technically took home only $60,000 after all the business deductions.
History. This is the aforementioned “two year” rule. Lenders now want to see you’ve got a somewhat reliable income history, so they know you can make your payments. One year of solopreneurship isn’t much of a history. If you just started out on your own this year, you may want to wait another one before buying.
Self-Employed Home Buyer Tips
Here are some ideas to start you off on the right path when seeking to purchase a home as a self-employed worker.
Find good people. Use a mortgage broker and/or underwriter familiar with the challenges of securing loans for the self-employed. We all need someone who can guide us through the process with consistent communication and guide us through the potential paperwork pitfalls.
Prepare for paper. You will likely have to submit more paperwork and proofs of income, debt rations and business expenses than someone who is more traditionally employed. Forewarned is forearmed.
Drop your debt. That debt-to-income ratio can be a big deal with lenders. Make yours as friendly as possible.
Get pre-approval. Yes, we suggest everyone do this. But especially for freelancers—who can struggle to understand where they stand in the mortgage world for all of the above reason—this is a vital step.
The reality is there are going to be a lot of self-employed home buyer mortgage applications as we move forward in this new economy, and the mortgage lenders have to understand this as well if they want to stay in business.
So knowing what you need to do—in advance—will go a long way towards a successful home-buying experience.