Going into the office 9-5, dealing with traffic, parking, and nosy co-workers is turning into a thing of the past. Freelance work is booming–with the new age of technology, remote work ,and companies hiring outside talent, freelancers are more prevalent than ever. Freelancers get to be their own boss, choose their own hours, and work from home. Seems like you’d be living the dream right? It could be–until you want to purchase a home.
Purchasing a home as a freelancer can be difficult, mostly because banks don’t particularly want to loan to those without proof of income. As a freelancer, you don’t get a W2 since you are a temporary or contracted employee. This means you get a 1099 or no tax documents at all, which can be difficult to prove your income for a mortgage. Don’t sweat it, Homie is here to help. Read below to learn how you can still buy the home of your dreams as a freelancer.
Make Sure Your Finances Are in Order
Freelancers are a riskier investment for mortgage companies because of their irregular income, tax write offs, and lack of W2’s. Make sure you have this documentation in order before your pre-approval to verify your income.*
- Last two years of personal tax returns
- Last two years of business tax returns (schedules K-1, 1120, 1120S)
- Last two months of bank statements
- Last two months of 401k, retirement funds, and/or taxable investment accounts
- Year-to-date profit and loss statement (P&L)
- Balance Sheet
- CPA letter stating you are still in business
*Consult your mortgage lender to determine what specific documentation you’ll need. Your Certified Public Accountant (CPA) should be able to provide this documentation for you.
Homie Tip: Mortgage lenders only count taxable income – so if you take as many deductions as you can (like most self-employed workers) on your taxes, your loan amount may be smaller than expected.
Calculate Your Self-Employed Income
With fluctuating income, it can be difficult for freelancers to calculate their home buying budget. Typically, mortgage lenders will average your income over the past two years and break it down by month. For example:
- Year One: $85,000
- Year Two: $95,000
- Average Yearly Income: $90,000 ($85k + $95k / 2)
- Monthly Income: $7,500 ($90k / 12)
This means you have $7,500 a month to spend on housing and other expenses. Mortgage lenders will also look at your DTI (debt-to-income ratio). Typically, they want your DTI to be under 45%. It’s important to try and pay off any outstanding debts before purchasing a home. This will increase your loan amount immensely.
Homie Tip: It’s extremely important to NOT start any new loans while going through the home buying process. This includes: car loans, opening new credit cards, personal loans, etc. These will hurt your credit score and also the amount the mortgage company will lend you. Find more first time home buyer tips here.
Additional Tips to get Started
Prepare, Prepare, Prepare
Make sure all your documents are in order and ready to go. You want to show you are profitable and sustainable to be an attractive candidate for a loan.
Save up for your Down Payment
The larger your down payment, the less risky of a borrower you are!
Have a Solid Credit Score
Pay off your credit card debt, student loans and other debts to boost your credit score to make yourself an attractive borrower to lenders.
Get Pre-Approved Before Shopping
This will help you know exactly what you can afford when touring homes. You don’t want to find your dream home then realize you can’t afford it!
Homie is Here to Help
Buying a home as a freelancer can be daunting, but if you are prepared with documentation and know what you can afford, you’ll be able to get the home of your dreams. Contact a local Homie real estate agent via our website or call (385) 429-6888 for any additional questions or to start the home buying process. Happy house hunting!
Source: homie.com