The growing number of employees who rely on part-time jobs or freelance work to make a living may have the freedom to work whenever they want, and sometimes from wherever they want. But when it comes to buying a home, all of that freedom has its price. Turns out, these employees don’t come packaged in the tidy financial box that mortgage lenders typically prefer.
These so-called “gig” economy workers don’t often have the requisite stack of W-2s to document wages. And predictions for future income can be murky. All of which can make obtaining a mortgage an uphill climb unless you, as the gig economy worker, do your homework and start preparing your finances and paperwork well in advance. Here are six tips to help prepare you for the home loan application process.
1. Get organized
The No. 1 piece of advice for gig economy workers who want to own a home is to spend time organizing all of your documentation, including proof of employment and income, the names and phone numbers of references, previous employers, landlords and more. You’ll also want to pull your credit scores so you know exactly where you stand. Gathering this information is more important for gig economy workers than typical borrowers, because you will have to work harder to convince a mortgage lender to approve a home loan.
2. Go the extra mile to educate your mortgage lender
You need to be able to explain to your mortgage lender what you do for a living. Take the time to educate him or her about your job. Perhaps print out a news article or other information that will help a lender understand what you do. Showing consistency in terms of the type of work you do also will improve your chances of obtaining a mortgage. A mortgage underwriter is looking for a stable history. Even if the gigs themselves start and stop frequently, gigs within the same industry or using the same skill set will be considered more favorably.
3. Ease up on the deductions
Self-employed individuals, as gig economy workers typically are, often use a Schedule C when filing taxes to report income and write off numerous expenses tied to working the way they do. The downside of deducting a long list of expenses from your income is that it reduces your profits on paper. You may bring in $73,000 in a given year. But after deducting the cost of everything from Internet and cell phone bills, to travel, business meals and professional memberships, your net income on paper may be far less. So, if you know you want to buy a home in the near future, consider forgoing some or all of the deductions for a year or two to increase the income you’re reporting.
4. But first, talk with a mortgage officer about your goals
Before completely doing away with claiming any or all expenses on your tax return, however, talk to a mortgage officer about your home buying goals. In other words, get educated about the income you’ll need to show on paper first, before throwing write-offs out the window. Once you’ve identified how much mortgage you’d like, it will be easier to determine what the monthly mortgage payment would be and thus, how much income you’ll need to be able to document.
5. Reduce your debt
Because you are a gig economy worker, mortgage lenders will require more assurance that you’re qualified for a loan and that you’re a good risk. Toward that end, work to reduce your debt to zero (or as low as possible) before applying for a mortgage, and keep your credit score in excellent standing.
6. Try a ‘bank statement’ mortgage
Newly emerging “bank statement” mortgage programs may be a good option for self-employed or gig economy workers to consider. Such mortgages rely upon reviewing 12 to 24 months of deposits to one bank account and a profit and loss statement for your business, in lieu of the traditional two years of tax returns, W-2s and payroll checks.