If you work as a freelancer or gig worker, you understand how the world is quite stacked against you. Taxes are higher and more difficult to file; your resume is a chaotic mess; and banks are always a bit hesitant to take you on given your irregular income. Unfortunately, when you finally manage to scrape together your earnings into a down payment for a home, you will inevitably find that buying property is also a headache when you aren’t a traditional employee.
Fortunately, that doesn’t mean it is impossible for you to own your own home. Here’s a guide to making the homebuying process as streamlined as possible when you are a freelancer or gig worker:
Get Your Paperwork in Order
There are certain documents required of everyone intending to buy property — but there is a bit more paperwork required from freelancers and gig workers. Lenders need to be certain that you have a reliable income that can pay a mortgage, and since you don’t have a standard monthly paycheck, you will need to put together a portfolio of documents proving that you are a safe bet. Some paperwork you should prepare ahead of time includes:
At least two years of tax returns
Two years of profit and loss statements
Bank statements showing your savings accounts
Certain lenders might have additional requirements, depending on what the above paperwork tells them about your income. You can contact a friendly local lender, like these trustworthy mortgage lenders in Charlottesville, VA, if you have questions about your special circumstances.
Keep Your Tax Deductions Low
Usually, freelancers like to deduct as much as possible, which allows them to cut their taxes while maximizing their business and lifestyle. Unfortunately, to lenders, a large amount of deductions looks like significantly lower income, which can interfere with your ability to pay for a larger mortgage. If you can plan your homebuying a couple years in advance, you should keep your annual deductions to a minimum to keep up appearances for the bank.
Make Your Credit as Strong as Possible
Freelancing has all sorts of benefits, but not with mortgage lenders. To make up for your risky employment status, you should try to increase your credit score to the high 700s or the 800s if you can swing it. Some ways to boost your credit include:
Don’t open any new credit lines in the months before applying for a home loan. Every new credit inquiry temporarily reduces your credit score.
Keep your current credit lines open. Though it might seem financially wise to reduce your lines of credit, cancelling credit cards messes with your credit utilization ratio, which can lower your score.
Check your credit report for errors. Credit bureaus are remarkably fallible, and their mistakes can make your life miserable. You should check your reports for errors annually, or at least just before you apply for a loan.
Save up a Larger Down Payment
Just as a better credit score works in your favor, a larger down payment makes you a more attractive client for banks. The more money you put into your down payment, the lower your loan amount will be, which decreases the lender’s risk and keeps your monthly payments lower. Though saving a down payment can be difficult, it is worth it to amass a sizeable portion of your home’s cost before you buy.
Eliminate Your Debts
The debt-to-income ratio is a simple calculation financial institutions use to understand how much house you can afford. Most lenders don’t like their lendees to take out more than about a third of their income in debt. Thus, if a sizeable chunk of your income is already devoted to paying credit card bills, medical debt, auto loans or other forms of debt, you need to work on eliminating those debts before you apply for a mortgage.
Freelancing and gig working gives you more control over your life and income, but it can make managing your finances a bit of a headache. When you are ready to take the plunge into home ownership, you should find a freelancer-friendly financial institution to work with, so you are more likely to get the loan you need to afford the home of your dreams.