For the majority of people in the workplace, a typical job entails going to work for an business that provides steady employment, predictable hours and a consistent stream of income. However, a growing number of Americans are considered self-employed and therefore may not have the consistency and predictability that salaried workers often rely on. In fact, 14.6 million people, or about 10 percent of the active workforce, were self-employed in the U.S. in 2014, according to Pew Research Center.
Needless to say, five years later, it’s likely that number has grown considerably.
These workers are part of what’s referred to as a “gig economy,” an industry in which temporary or flexible jobs are the norm. Small business owners, freelancers, contractors and artists are common examples of workers in a gig economy.
The Challenges of Buying a Home When You’re Self-Employed
In a gig economy, there is no fixed salary, which means income can be less predictable and it can be more difficult to apply for credit. Buying a home may be especially challenging for workers in a gig economy, as getting a mortgage often requires proof or documentation of income.
While it may be a little more challenging to get a mortgage when you’re self-employed, it’s not impossible. So how do you get approved for home financing when you don’t have consistent, documentable income?
Explore Alternatives to Traditional Home Loans
With a typical, conventional mortgage, borrowers usually have to provide documentation of their income, along with credit history information and credit scores. However, there are some unique home loan products in today’s mortgage marketplace that are designed to help freelancers, contract workers, self-employed borrowers and the like, obtain financing and achieve their homeownership goals.
These loans are often referred to as Simple Access programs, and as the name implies, they are generally more accessible to borrowers who have complex or unique financial scenarios. One such program is the Bank Statement Qualifier Loan.
Bank Statement Qualifier
The Bank Statement Qualifier loan allows qualification based on balances in deposit accounts rather than on a W-2 or tax return document. The bank accounts may be personal or business accounts, allowing even more flexibility for the borrower.
Another Simple Access option is the Asset Qualifier mortgage. This loan product allows the use of assets to qualify for the mortgage instead of typical income documentation. This may be an ideal solution for borrowers who have substantial assets but lack consistent, documentable income.
If you do not qualify for these Simple Access loan solutions, don’t give up. You may still be able to apply for a traditional mortgage; however, you’ll likely need to provide additional documentation and more detailed records of income/assets/debts.
How to Prepare
If you work in a gig economy and your goal is to buy a home, it’s important to take the necessary steps to prepare for mortgage success. First thing’s first: get organized.
Being organized and ensuring you have all of your business/employment paperwork sorted can be a huge help when applying for mortgage financing. Although you may not need to provide documented proof of income for some types of loans (like the ones mentioned above), other types of loans for self-employed borrowers may require copies of signed, federal tax returns for the last two years. You may also need to provide a year-to-date profit and loss statement. Other documents may be required depending on the lender or the type of loan you’re getting.
Keeping track of these things throughout the year will make it easier to pull the information you need when it comes time to apply for a mortgage.
Next, focus on beefing up your down payment. While some loans, such as the Simple Access loans, will allow financing up to 80% of the property value, having a sizable down payment can really help your chances of getting approved and locking in a lower interest rate. If your goal is to buy a house within the year, you may not have a lot of time to save up, but if you’re thinking about doing this further down the road, start saving now and keep at it.
Last but not least, work on lowering your debt. If you have credit card balances, unpaid medical bills, student loans, etc., do what you can to pay down those balances. Most financial experts advise to start with the highest-interest balances first. These are usually (but not always) credit cards or retail store lines of credit. Once you get those under control, move on the next-highest interest balance. And remember, you don’t have to be completely debt-free in order to qualify for a mortgage–even if you are self-employed. It just helps make you a more creditworthy applicant if you can demonstrate to the lender that you are able to handle your debts responsibly.
Where to Learn More
Want to learn more about Simple Access Loans, or explore other home financing options? Give us a call.
Call us today: (888) 379-0303
Four Landmark Sq. Suite 300
Stamford, CT 06901