Getting ready to buy a house can be a daunting task for anyone—but if you’re a freelancer, you may be wondering if you’ll be able to qualify at all. Traditionally, lenders use documents like W-2s and pay stubs to verify your income as part of the application process… but if you’re working for yourself, you likely don’t have those.
Fortunately, it may still be possible to qualify for a prime home loan, even if you’re an independent contractor. Your paperwork will just look a little bit different than your salaried-employee counterparts’, and you may also benefit from looking into alternative types of mortgages.
Let’s take a closer look.
How can a self-employed borrower qualify for a mortgage loan?
Even as a freelancer, you may qualify for a conventional mortgage. (Yes, even without those two most common income verification documents we listed above.) After all, with the increasing prevalence of the gig economy and a proliferation of freelance income, lenders basically have to lend to self-employed people.
Of course, you will still need to prove your steady income in some capacity in order to qualify—mortgage lenders are taking a risk by offering you so much money up front, after all. It’s in their best interest to ensure you’re actually able to make your mortgage payments.
In lieu of W-2s and pay stubs, most conventional mortgage lenders will accept two years of tax returns, potentially aided by other documents such as bank statements or business paperwork including business tax returns, a copy of your business license, and profit-and-loss statements.
What does this mean for you, as a self-employed person who’s considering diving into the housing market? For one thing, it means you need to be diligent about keeping, and organizing, your paperwork. Misplacing your tax returns could spell trouble when it comes to your mortgage application, so be sure all your ducks are in a row ahead of time.
Another important note: be tactful with your tax deductions. Yes, as a full-time independent contractor, taking as many write-offs as possible can help lower your bill when it comes tax time… but that’s precisely because it makes your income look lower. If your taxable income looks too low to a mortgage lender, they might not qualify you at all, so in the years leading up to your home-buying journey, it might behoove you to itemize fewer business expenses.
And, as is true for all borrowers, it doesn’t hurt to ensure your other financial stats are as high as possible. Working toward improving your credit score, lowering your debt-to-income ratio (DTI), and getting yourself on sturdy financial footing may help you not only qualify for a mortgage, but also obtain better possible interest rates and terms.
What types of mortgage programs are best for a freelancer?
Aside from conventional mortgages, there are other home loan programs to consider that may help you hop the hurdle into homeownership—especially if your credit score needs work or you won’t be able to save up a significant down payment.
In that case, a government-insured home loan program like an FHA loan or a government guaranteed home loan program like a VA loan, which is for veterans and their families, could help you get the keys to your dream home with a small down payment (as low as 3.5% for FHA loans, or 0% for VA loans), and both have relatively low minimum credit score requirements: 580 for an FHA loan (though you may qualify with an even lower score if you can put down 10%), and usually around 620 for a VA loan. (The VA itself doesn’t set a minimum, but the private lenders who offer these government products may.)
Now, say you’re on the other end of that spectrum: you’ve got a good credit score and the ability to put down a significant amount up top, but your income is irregular and hard to document. There are great alternative options for you, too!
One possibility is a hard money loan, which uses an existing asset as collateral. This type of loan may work for you if you have significant cash or real estate holdings, even if your DTI and credit score could use some work.
Another option to consider: Quontic’s Community Development Loan (CDL)1. Utilizing a holistic financial picture as part of our qualification process, these loans are custom-built for non-traditional borrowers, including freelancers and self-employed individuals as well as small business owners, foreign nationals, lower-income families, retirees or anyone whose documentation just looks a little bit different.
While these loans do require a relatively high minimum down payment and credit score, they offer flexibility when it comes to required income documentation—as well as the opportunity to use up to 100% gift funds for your down payment and closing costs.
Quontic also offers many other home loan programs, and we’re standing by to help match you with the product that will work for your needs. Contact one of our mortgage specialists today!
1Quontic Bank is not affiliated with or acting on behalf of or at the direction of Federal Housing Authority (FHA) or any government agency or government sponsored entity. All lending products are subject to approval. Rates, program terms & conditions are subject to change without notice. Not all products are available in all states or for all amounts. This does not represent an offer to enter into a loan agreement. Other requirements, restrictions & limitations apply. Information is accurate as of April 2, 2022 & is subject to change without notice.