Freelance Finance: Renting vs. Buying a Home

By Kali Hawlk, Contributor, on May 28, 2018

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Wondering whether you should rent or buy a home? Of course, your stream of income and the way in which you earn your living should have a major impact on this decision. Overall, it’s important to think within the context of your own freelance finance situation. If you’re an indy thinking about buying a home in the near future, consider your answers to the following questions before you pick a side in the rent versus buy debate.

Is a Home Something You Truly Want?

If buying a home isn’t for you, there’s nothing wrong with continuing to rent. In fact, renting can provide value in many ways. And just think: You have more time to focus on your freelance work because, unlike homeowners, you’re not responsible for tackling any required maintenance or home repairs.

When you rent, you may save money, too. It’s likely that the most you’ll need to pay for your home each month is the cost of rent and utilities — depending on the terms of your lease. But, when you own your own home, your monthly mortgage payment is the least you’ll pay each month. You’re on the hook for necessary updates, emergency fixes and regular repairs. Regardless, keep in mind: Unlike renting, purchasing a home is an investment that holds potential future profit.

It’s okay if you do want to buy. You just need to think critically about your financial situation to make sure you’re prepared for homeownership first.

Do You Have a Reliable Stream of Income?

You may be driven to focus all your energy on what you earn today and what you hope to make in the future. But mortgage lenders will also want to know about your past earnings so they can get an idea of whether your income stream is reliable.

“Mortgage lenders will default to using two years of personal tax returns for a self-employed borrower,” explains Dan Green, founder of mortgage advice website Growella. Green says lenders will also request business tax returns if you file them. “There are instances when more, or less, paperwork will be requested,” he says, noting that lenders may use discretion in some situations.

Have You Made Too Many Deductions?

It may come as a surprise, but your freelance tax deductions could actually hurt you when you’re looking to buy a home.

“Freelancers often write off everything they can think of to bring their net taxable income as low as possible,” explains Casey Fleming, a mortgage advisor in Silicon Valley and author of “The Loan Guide: How to Get the Best Possible Mortgage.” “The problem with this is that Fannie Mae and Freddie Mac require lenders to use the net income from a freelancer’s Schedule C as the income to qualify for the loan.”

As a result, Fleming says a freelancer’s allowable net income may be too low to qualify for a mortgage — but adds that there are other ways some lenders can verify you have enough income to qualify. “We ask you to provide the 1099s you receive at the end of the year from your clients,” Fleming says.

How’s Your Credit?

Your credit score goes a long way in determining the type of mortgage for which you qualify and the specific interest rate you receive on that loan. The higher your credit score, the more likely you’ll get approved for the mortgage you want at a low interest rate.

Low scores make it harder to qualify. If you do get approved for a loan, you’ll probably need to pay a higher interest rate. And when it comes to a mortgage, that can cost you tens of thousands of dollars more over the life of the loan.

Do You Have Enough Money for a Down Payment?

In addition to a good credit score, you’ll need to make a down payment before you can buy a home. Typically, lenders want to see that you can put down 20 percent of a home’s purchase price — in cash.

That can be tough to do when your freelance payments change month to month. It doesn’t mean you can’t qualify, but if you put down less than 20 percent, you’ll need to pay private mortgage insurance (PMI) on your loan for a period of time.

FHA loans might be a good option, since they require as little as 3.5 percent down if your credit score is over 580. But these loans also come with added fees and insurance premiums, which could cost you more in the long run.

If you do decide to buy a home, make sure your down payment won’t drain your retirement and emergency savings — no matter what type of mortgage you choose.

Are You Willing to Settle Down?

If you can check off all the financial boxes, there’s one more question you should ask yourself: How long do you plan to live in that location?

When you rent, you can move anytime with little hassle. You may need to break your lease, but you’re not responsible for the sale of the property. When you own a home, moving elsewhere may not be so easy.

Selling can be a lengthy process, depending on how the market looks — and it can be expensive, too. Sellers pay the real estate agent’s fees and may be on the hook for addressing a buyer’s conditions for their accepted offer on the home, like updating the roof or replacing the water heater.

A good rule of thumb is to plan to stay in a home for at least five years. If your freelance work takes you to different cities — or maybe you just travel a lot because you’re not tied to an office — renting may be the smarter decision. But if you have the right freelance finance situation and you’re ready to commit to a home long-term, it may be time to start house hunting.

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