April 15 is a little different for the self-employed. The date holds no particular significance, income is often erratic (killing it one month, eating ramen for dinner the next), there are no W-2 forms at year’s end, and their filing system contains zero paycheck stubs.
If you make your living driving others around in your personal car, delivering restaurant food, grocery shopping for others, renting out rooms or homes to vacationers, or freelancing online – you are self-employed.
In other words, a member of what is commonly known as the “gig economy.”
The freedom offered by working as an independent contractor is amazing, but it does come with some drawbacks. You’ll meet up with one of them when you try to get a mortgage to buy a home, including here in Southern Maryland.
A large real estate portal reported that self-employed workers:
- Earn more than employees
- Have more cash on hand
- As a group, receive 40 percent fewer mortgage quotes than other homebuyers
- Apply for homes that cost 12 percent more, on average, than other borrowers
- Are “twice as likely as other borrowers to report a [credit] score of less than 680”
None of these factors either automatically qualify or disqualify gig economy workers hoping to get a mortgage to buy a Southern Maryland home, but the low credit scores and lack of income documentation do present a challenge.
Deal with your credit score first
No matter how well you can document your income, a poor credit score will be your biggest obstacle in getting a mortgage.
The simplest way to raise your score is by paying your bills on time and by not applying for new credit. Then, consider the following:
- Pay down your debt (credit cards, personal loans, etc.)
- Don’t close unused credit cards (they count in your favor)
- Dispute inaccuracies on your credit reports
- Keep credit card balances to 30 percent (or less) of your credit limit
Visit the Federal Trade Commission’s website to learn how to order your free credit report.
Gather the necessary documentation
Your accountant may be OK with your shoebox of records, but your lender will not be. Documentation requirements vary, but you’ll typically need to provide the lender with the following:
- The past two years’ tax returns (with all schedules)
- A profit and loss statement (yes, even gig economy workers will need to supply one). Wells Fargoand Chase offer fill-in PDF profit and loss statements online, and com offers one that you can download and print.
- Bank statements (your lender will tell you how many are required. Submit allpages, including those that are blank).
These are the basic documents required; your lender may ask for additional information. Also, Fannie Mae guidelines are a bit different, and you may be able to qualify with only the most recent tax return.
Other things to consider
Tax deductions are the holy grail for the self-employed because they reduce income and, thus, the amount of taxes owed.
This presents a conundrum when it is time to apply for a mortgage because the opposite is true: you want to show as high an income as possible. If all else fails:
- Put off buying a home for the next two years and, during that time, cut back on the number of business expenses you write off.
- Save up a large down payment. This will lower the amount of the loan you’ll need to qualify for.
- Consider purchasing a less expensive home that will be easier to qualify for.
Sen. Mark R. Warner (D-VA), co-sponsor of the Self-Employed Mortgage Access Act, claims that “as many as 42 million Americans — roughly 30 percent of the workforce — are self-employed or in the gig economy,” according to the staff at Bankrate.com.
Thankfully, the mortgage industry is waking up to this fact and easing requirements for some loans.
By the way, we aren’t mortgage or tax experts and urge you to consult with yours if you have any questions.
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