Getting a Mortgage: The Freelancer’s Guide

By Liz Alton, Contributor, on March 26, 2018

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Getting a mortgage — even when you have a regular salary and a great credit score — can be a stress-inducing process. But as a freelancer, this journey is even more complex, and it requires strategy, organization and careful planning.

When I applied for my first mortgage, I had no idea it’d require years’ worth of documentation, copies of contracts, client references and more. Freelancers I know have told me they’ve had to do everything from producing seven years’ of income tax returns to filling out multiple applications before they were approved, even with a steady second income.

Here’s a closer look at the ins and outs of getting a mortgage as a freelancer — and how a bit of pre-planning can streamline the process.

24 Months of Glory

Getting a mortgage as a freelancer typically means opening your books and providing documentation that you’ve had at least 24 glorious, profitable months in business. In the past, the “self-cert” mortgage allowed contractors, freelancers and business owners to simply state what they made — and these mortgages were often fast-tracked without verification. Unfortunately, this contributed to the sub-prime crash, leaving the industry with much tougher standards. While every lender is different, most will want to see at least two years’ worth of steady freelance income. Be prepared to provide:

  • At least two (and possibly more) years’ of tax returns — both personal and business

  • Copies of your business bank statements that show deposits

  • Business credit card statements

The Future Is Bright — I Swear

Once you’ve successfully demonstrated that you’ve been in business and profitable for a few years, you may also need to show that your future book of business looks steady. If you’ve recently had a dramatic increase in income or you’ve undergone some rocky periods, lenders will look for you to provide indications of stable performance. Some options include ongoing contracts, letters of reference from clients stating their intention to continue working with you and projected income from booked projects. In one case, a lender asked for a copy of a freelancer’s business plan and marketing strategy to get a better feel for the sustainability of her business.

The Reality of Returns

When applying for a mortgage, applicants generally want to show as much income as possible. But it’s important to consider how the current tax regulations guide business owners to run their businesses.

In a nutshell, income minus expenses equals revenue. Many freelancers and other business owners maximize their tax deductions to minimize their tax payments, but doing so lowers their revenue. Ultimately, a bank will make a loan to you based on your profits. If you’ve maximized your deductions year over year, this can lower the amount you’re able to borrow. Here are a couple of things to keep in mind:

  • Freelancers who start thinking about getting a mortgage ahead of applying should consider minimizing their deductions.

  • It may be possible to write a justification of your business expenses — if some were extraordinary. For example, if you completely remodeled your office space last year, that might account for an unusually large set of deductions that impacted your income.

Separate Your Personal and Professional Finances

As a best practice, freelancers should separate their personal and professional finances. Consider setting up a separate checking account, using a business credit card and operating a business-focused PayPal (or other online payments account), if applicable. If you don’t make this distinction and a lender sees that your personal and professional finances are co-mingled, they may question whether you operate your business professionally.

Terrific Credit Helps

When you’re applying for a mortgage, your FICO credit score can make all the difference. While your income largely drives the type of house you can afford, it’s your credit score that’ll determine the interest rate you’re offered. As a freelancer, your credit score will play an even larger role in saying, “Even though I have variable income, I’m still a great investment.” Make sure you:

  • Go online and pull a free copy of your credit report. Make sure everything is accurate. Then, dispute errors and address any issues (i.e., an account that’s in collections).

  • Look for ways to increase your score, and make sure that you make payments on time in the months leading up to your application.

  • Don’t make any big moves, such as taking out an auto loan or applying for several new credit cards, when you’re planning to take out a mortgage. These types of actions can negatively impact your credit score for a period of time.

Other Freelancer Tips

So, you’ve got all those tips down. Here are a few more strategies that’ll increase your chances of getting a mortgage as a freelancer:

  • Save, save, save: A big down payment can help make a persuasive case for a mortgage.

  • Ask around: Certain lenders are more freelance savvy than others. Ask freelancers in your network for lenders they recommend.

  • Use a broker: A broker will shop around and help you find the best rate on a mortgage. They can also help you find freelance-friendly lenders in your area, or help you determine which lender is likely to have the most reasonable application process and timelines.

If owning your own home is a dream, it can feel like owning your own business is making things difficult. The reality? Freelancers need to be organized and strategic here. Make sure you have your accounts and documentation in order before you start the mortgage process. Dream big, get those financial statements in order and work your network to find a lender who’ll see that you’re credit worthy.

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