Essential Tips for Freelancers Applying for a Mortgage

It’s no secret that qualifying for a mortgage as a freelancer is difficult. But that doesn’t mean it’s impossible. The main challenge lies in proving your self-employed earnings to lenders, which tends to be a more complicated process than handing over your pay stubs as a regular employee.

It also doesn’t help when your income fluctuates by the month, you have little job security, and you must invest into your business throughout the year. All this to say that you can get the same mortgage rates as regular employees; you just have to work a bit harder to prove your income to lenders. Here are some tips and resources from ButlerBlog to guide you through the process:

Consider Your Self-Employed Status

First, let’s touch on how lenders process the applications of different self-employed individuals:

• If you own a limited company, you will likely need to provide the lender with your salary and dividends. That said, the lender may base your income on the company’s retained earnings.
• Freelancers can use three years of accounts and charge a daily rate (like contractors). In that situation, the lender will multiply your daily rate by the number of working days in the year.
• If you’re a sole trader, you can probably get away with showing three years of accounts. You may be able to boost credibility by incorporating profit projections.
• As a freelancer, you can form an LLC to save on taxes. You can then use that money to put toward a down payment on your home!

Explore Your Mortgage Options

Depending on your specific situation, you might have a few different types of mortgages to choose from as a freelancer.

• You may qualify for a conventional loan with favorable terms if you have two years of tax returns and a strong credit score.
• When your credit score is below average, or you can’t afford a down payment, you may need to apply for an FHA loan.
• If you’re an active or former military member or a low-income individual residing in a rural area, you could qualify for a VA or USDA loan. Neither type of mortgage requires a down payment.
• Be sure you have an accurate assessment of the housing market where you plan to live. This will help you determine the proper budget.

Improve Your Odds

Freelancers face several challenges when it comes to qualifying for a home loan. Here are some ways to put yourself in a better position to secure a mortgage.

• Save up to pay a larger down payment.
• Organize all your paperwork (e.g., income statements, tax returns, bank statements) for the lender.
• Improve your credit score and credit history.
• Wait until you have freelanced for at least three years before applying for a mortgage.

It may be more challenging to get a mortgage as a freelancer. But if you prepare and take a few extra steps, you can land a favorable home loan. Consider the tips and resources above as you prepare for the application process.