Freelancers: Here’s What You Need to Know About Getting a Mortgage
Qualifying for a mortgage as a freelancer is tougher than you may think – especially if you're relatively new to self-employment.
Truth be told, when my husband (then my fiancé) and I began preparing to purchase our first home, I was a burden. I know exactly what you’re thinking: my writing career as a freelancer simply must not have been generating enough money to allow me to contribute. Therefore, I needed to ride on the coattails of my fiancé’s full-time job and steady paycheck in order to get the home of my dreams.
Given the reputation of a freelancer’s income, I don’t blame you. And having started on this new career just months before house-hunting, I actually was a little strapped for cash.
However, it wasn’t my uncertain income that excluded me from the mortgage-qualifying round. Despite my limited pennies, I was more than willing to be an equal partner in the house-buying process.
The bank? Well, they had different ideas.
They told me that my income would flat-out not be considered when pre-approving us for a mortgage loan amount.
Instead, the loan would be based on my fiancé’s income alone.
This came as a surprise, to say the least. So I’ve made it my mission to spread the word to others who might find themselves in the same boat. Let’s break this down, shall we?
The truth about mortgage loans
When it comes to mortgage loans, there’s a special exception for freelancers, business owners, and even realtors. Basically, it’s a rule for people who are self-employed with a resultantly sporadic income.
So, what exactly is this rule? Well, the bank told me that I needed two full years of freelancing income history to share with them in order for them to weigh that in as a consideration for our loan amount. Be forewarned: these specific restrictions might vary from bank to bank. So you’ll want to talk to your own bank to determine exactly what you need.
However, the general rule of thumb is that you’ll need to share 24 months’ worth of income history (in the form of your personal and business tax returns). They average those two years to get a general idea of how much you make during a typical year. Then they can then use that to determine what size loan you could realistically handle.
At this point I had only been freelancing for a handful of months. So I had next to no information to share with them.
My business was just getting off the ground – I barely had two months’ worth of income to report, let alone two full years.
So we were left with a choice. We could wait for two years until I had built up a solid enough income history as a freelancer for them to consider, or we could qualify for a loan using just my husband’s income.
The latter option was a little demoralizing. I was making money, so why couldn’t I be an active part of the purchasing process? Why was I being punished by being self employed? It was painful to watch my fiancé sign his name on that never-ending pile of paperwork. Starting my own business as a freelancer was a scary enough leap without being made to feel like a lesser half of our partnership.
Why are banks hesitant to give loans to freelancers?
It didn’t take me long to begin to understand where the bank was coming from.
After all, it’s a big risk to lend money to a freelancer – someone who might make $7,000 one month and only $700 the next.
But just because I could understand it, that didn’t mean I liked it.
My fiancé and I wound up working out our own arrangement. I wrote him a check to contribute to our down payment, and we continued to shuffle money around between the two of us to cover the mortgage and other living expenses until we were finally married and shared joint accounts.
It was undoubtedly a bit of a roundabout way to involve me in the process, and it had its frustrating moments. As a freelancer, I still work full-time – just not in the way a bank can calculate. But in the end, it was actually a good thing. The fact that we received our loan amount after reporting only my husband’s income means that we took on a loan and bought a house that was priced well within our budget.
While the process was far from painless, knowing we’ll never be house poor? Well, that’s priceless.