How to Purchase a Home While Self-Employed

Being self-employed can offer a great deal of flexibility and freedom. Rather than being tied down to a single company, you can arrange your work around your lifestyle and choose your assignments. 

Unfortunately, being a freelancer or gig worker also has its downsides. In addition to things like buying a health insurance plan, saving up for taxes or filing a tax extension, and managing your 401k, you also may find it more difficult to buy a home through traditional financing. This is because mortgage lenders often require specific documentation, such as W2s and bank statements, in order to approve a mortgage.

However, this doesn’t mean it’s impossible to get your own home while self-employed. Today, we’ll guide you through the steps to get a mortgage as a freelancer or gig worker so you can secure the keys to your castle.

Who Do Mortgage Lenders Consider Self-Employed?

First, a quick note. If the bulk of your income is from self-employment, such as freelancing, independent contracting, or gig work, then you are considered self-employed even if you have a side job that provides a W2. You will not be regarded as self-employed if most of your money comes from a salaried or part-time job that offers a W2.

Look for Alternative Mortgage Options

Even with great documentation and a high income, you may still be turned down for a conventional mortgage. You may also have a hard time getting FHA, VA, or USDA loans, which are more lenient in terms of qualification but also require ample documentation. 

Thankfully, you have other options. For example, you can apply for bank statement loans, which use 12-24 months of personal or business bank statements to determine whether you are eligible for a loan. 

Just like with a traditional loan, your interest rate will greatly depend on your credit score and overall borrower profile. If you have a high income, a great credit score, and a long history of responsible debt management, then you may be able to get a highly competitive interest rate with a bank statement loan. 

Document Your Expenses

Before you even begin looking for a home, you should get all your financial affairs in order and meticulously gather all the details. Use automatic accounting software to keep track of your expenses and gather all your tax documentation together. Many LLC owners find it difficult to separate personal from professional costs, so it can be helpful to open a separate business account for your business needs and then pay yourself a wage from this account. This way, you have a clear cash flow and can prove how much your business is making. 

Gather Financial Details

All mortgages require documentation, but self-employed individuals must provide more than most. This includes two years of business tax returns, bank statements, profit and loss statements, a balance sheet, personal and business assets, and any additional sources of income. You may also be required to provide articles of incorporation for your business in addition to both business and personal tax returns. 

The longer that you have been in business and generating positive cash flow, the more likely that you will be considered a trustworthy borrower. If you’ve only been self-employed for a year or two, you may need to provide letters from your clients demonstrating that they intend to continue working with you for the long term and that you can be expected to have a similar income for the next few years. 

In general, it’s always better to provide more documentation rather than less. This ensures that the underwriter won’t have to come back and ask you for more information; it will already be available. Organize all your documentation by year, account number, and whether it is personal or business-related. You can then provide this to your loan officer, who will look through it and decide what documentation is necessary to get you approved. 

Offer a Larger Down Payment

Bank statement loans are called non-qualified mortgages or non-QM loans. This is because they do not qualify to be repackaged and sold on the secondary mortgage market. Instead, they are kept in the lending company’s portfolio, meaning that the lender will take a loss if you default. Because of this, lenders want to be entirely sure that you will not default, and they will often require a larger down payment than you may have to provide for a traditional mortgage.

The higher the down payment you can provide, the more likely you are to qualify. While you may be able to provide just a 10% down payment on some bank statement mortgages, you should budget for 20% to 25% if possible. 

Unfortunately, many down payment assistance programs require you to get a 30-year fixed-rate traditional mortgage if you want to access funds, meaning that you may struggle to find assistance in this regard. However, scrupulous saving and working on paying down your other debts may qualify you for a lower down payment.

Owning a home is not an impossible dream for freelancers and self-employed workers, though it may require a little savvy and creativity. By looking beyond traditional loan options and getting your documentation in order, you can secure a beautiful home while maintaining the flexibility of self-employment.