The growing number of gig economy workers in this country 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.
It turns out employees who have many part-time jobs, hop from one short-term contract or project to the next, or rely on freelance work as opposed to permanent jobs, don’t come packaged in the tidy financial box that mortgage lenders typically like.
“Historically the mortgage industry wants everything — residency, credit score and a two-year history of employment. And we’re also trying to predict the likelihood of that continuing for the next three years,” said Whitney Fite, senior vice president, strategic accounts for Atlanta-based Angel Oak Home Loans. “With the gig economy, we’re seeing less and less people fitting in that box.”
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 Fite has 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. You can get your two free credit scores on Credit.com.
“Have all of your records, have all the dates of where you worked, who you worked for. It’s going to be onerous from a documentation standpoint, but you need to be prepared,” said Fite.
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.
“You need to prove that your past two years are normal. And that the likelihood of continuance is there,” said Fite. “Be prepared to supply a lot of documentation for that, such as articles about your industry. Things of that nature go a long way. The mortgage lender is not going to make a decision based on it, but it will help create a level of comfort.”
In addition, showing consistency in terms of the type of work you do will improve your chances of obtaining a mortgage, said John Moran, a mortgage professional who runs The Home Mortgage Pro.
A mortgage underwriter is looking for a stable history. Even if the gigs themselves start and stop frequently, gigs within the same industry or utilizing 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.
“Use caution in how you’re deducting expenses as it’s the net income that’s used to qualify for a mortgage, not the gross pay,” said Kevin Hardin, a senior loan officer with HomeStreet Bank. “It’s tempting to use the full breadth of the IRS tax laws to reduce taxable income, but every dollar that is reduced from that taxable income reduces the income that can be used for qualifying for a mortgage.”
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. (Here are some tips for finding a good mortgage lender.)
“Go to a mortgage officer and say, ‘This is the amount of home I want to buy, how much income will I need to show?’” said Hardin. “Don’t just arbitrarily stop writing things off.”
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.
“The first step is to talk to a mortgage loan officer and then take that information to your tax preparer and say, ‘This is the number I need to hit in terms of income,’” Hardin said.
5. Get Your Debt Down
Let’s stress this one more time — 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.
To that end, work to get your debt down to zero, or as low as possible before applying for a mortgage, and keep your credit score in excellent standing, said Casey Fleming, a mortgage adviser since 1995 and author of The Loan Guide: How to Get the Best Possible Mortgage.
“Self-employed borrowers are going to be held to a higher standard because there is an added layer of risk with them,” said Fleming.
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, said Fite, of Angel Oak Home Loans.
Such mortgages rely upon reviewing 12 to 24 months worth 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.
“These are geared toward the gig economy. It’s a rapidly growing segment of mortgages across our industry,” said Fite.
A variety of mortgage lenders are beginning to offer this loan option.
More from Credit.com
- What Credit Score Do I Need to Buy a House?
- Does Your Credit Score Affect Your Homeowners Insurance?
- Financing Your First Investment Property
This article originally appeared on Credit.com.
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1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 6.97% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 6.30% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of Month/Day/Year, and are subject to change based on market conditions and borrower eligibility.
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Laurel Road Disclosures
APR stands for “Annual Percentage Rate.” Rates listed include a 0.25% EFT discount, for automatic payments made from a checking or savings account. Interest rates as of 11/8/2018. Rates subject to change.
Variable rate options consist of a range from 3.27% per year to 6.09% per year for a 5-year term, 4.64% per year to 6.14% per year for a 7-year term, 4.69% per year to 6.19% per year for a 10-year term, 4.94% per year to 6.44% per year for a 15-year term, or 5.19% per year to 6.69% per year for a 20-year term, with no origination fees. APR is subject to increase after consummation. The variable interest rate will change on the first day of every month (“Change Date”) if the Current Index changes. The variable interest rates are based on a Current Index, which is the 1-month London Interbank Offered Rate (LIBOR) (currency in US dollars), as published on The Wall Street Journal’s website. The variable interest rates and Annual Percentage Rate (APR) will increase or decrease when the 1-month LIBOR index changes. The variable interest rates are calculated by adding a margin ranging from 0.98% to 3.80% for the 5-year term loan, 2.35% to 3.85% for the 7-year term loan, 2.40% to 3.90% for the 10-year term loan, 2.65% to 4.15% for the 15-year term loan, and 2.90% to 4.40% for the 20-year term loan, respectively, to the 1-month LIBOR index published on the 25th day of each month immediately preceding each “Change Date,” as defined above, rounded to two decimal places, with no origination fees. If the 25th day of the month is not a business day or is a US federal holiday, the reference date will be the most recent date preceding the 25th day of the month that is a business day. The monthly payment for a sample $10,000 loan at a range of 3.27% per year to 6.09% per year for a 5-year term would be from $180.89 to $193.75. The monthly payment for a sample $10,000 loan at a range of 4.64% per year to 6.14% per year for a 7-year term would be from $139.65 to $146.76. The monthly payment for a sample $10,000 loan at a range of 4.69% per year to 6.19% per year for a 10-year term would be from $104.56 to $111.98. The monthly payment for a sample $10,000 loan at a range of 4.94% per year to 6.44% per year for a 15-year term would be from $78.77 to $86.78. The monthly payment for a sample $10,000 loan at a range of 5.19% per year to 6.69% per year for a 20-year term would be from $67.05 to $75.68.
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the variable rate will decrease by 0.25%, and will increase back up to the regular variable interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
3 Important Disclosures for SoFi.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown.
All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 2.28% effective October 10, 2018.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
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