Self-employment doesn’t have to disqualify you from home ownership...
Frank Merola is Executive Mortgage Banker for William Raveis Mortgage LLC.
If you have been paying attention to the news lately, you have likely heard that the stock market is booming, and unemployment is at an all-time low. Along with the low unemployment rate comes a lot of employment in what is known as the “side-hustle” and “gig economy.” These jobs include freelancers, independent contractors, drivers, work from home situations and rental hosts. Most of these gig jobs and side hustles mean a borrower is self-employed and not your typical 9-5 employee paid on a W-2 tax form. Self-employment doesn’t have to disqualify you from homeownership.
Here are a few things to consider when trying to obtain a mortgage in the gig economy:
- Have your credit score checked: A good out credit score can help you qualify for more loan options. The higher the better is always good when discussing credit scores. Scores over 800 are considered outstanding. Scores over 700 open a up a variety of options to you and scores in the 580-700 range need to be paid attention to. Home buyers should have their credit checked for any possible issues like collection and try to have these resolved before buying a home.
- Save for a down payment: When you’re self-employed it is important to set aside money to pay your taxes and save for a down payment. There are home loan options with everything from 0-20% down or more, and the more you can put down on a home, the less you are borrowing and working towards a lower monthly payment. When saving for a down payment make sure you put the money in the bank and season it for sixty days. Large deposits are questioned when buying a home.
- Know your debt-to-income ratio (DTI): Your DTI compares how much you owe each month to how much you earn. Specifically, it’s the percentage of your monthly income that goes towards payments for housing, loans, credit cards, or other debt. The key to this process is when you’re self-employed, the lenders will use your adjusted gross income after you take out expenses. You will need to provide at least two years 1099’s and tax returns to your lender to verify your income for consistency. Higher deductions on your taxes may mean you pay less taxes, but may also reduce your ability to qualify for a loan.
- Work two years: Self-employed borrowers need to show two years of tax returns supported by 1099’s. Lenders can use two jobs or seasonal employment situations as long as you have done both for two years. So, make sure that all part time jobs, gig jobs, side hustles, seasonal jobs or even unemployment has at least a two year history with supporting W-2’s and 1099’s to be able to count it towards qualifying.
- Explore other options: If you don’t qualify for a conventional loan, explore government-backed FHA, VA or USDA loans. State specific loans like Mass Housing may help, too. All may be viable options for gig-working borrowers with varied financials.
So applying for a mortgage in the gig economy should not disqualify you from homeownership. With a bit of extra preparation and documentation, you’re on your way to owning that home you’ve been dreaming of.
Executive Mortgage Banker
NMLS Mortgage Loan Originator ID: 1020051
William Raveis Mortgage LLC NMLS ID #2630
Email [email protected]