Purchasing A Home In The Gig Economy
The gig economy refers to a departure from the traditional employer-employee relationship in which flexible or temporary jobs are the norm like freelance or contract work. The growing number of gig economy workers or self-employed have the benefit of working flexible schedules and sometimes work from wherever they want. However, when it comes to getting a mortgage it can lead to some complexity as there is no fixed salary, and income is sometimes not even documented.
However, it is not impossible as all you need is a little planning for documentation and finances. Here are some important guidelines that will help you tackle the challenges of securing a mortgage without a full-time or temporary job.
You need to work harder than a typical borrower to convince the lender to approve of your home loan, so the first thing you need to do is organize all your documentation. The documents you will need include proof of employment and income, signed federal tax returns from at least the last two years, and perhaps a year-to-date profit and loss statement. You will also require your debt records (monthly payments like car loans, student, and credit card loans) and proof of assets (checking and savings accounts, bonds, stocks, and other securities). Additional records like phone numbers, dates, and references of employers, landlords, and more. You should also pull out your credit scores to know where you stand.
Build Up Your Down Payment
Save and keep adding money for the down payment. The more the down payment the lower will be the loan-to-value ratio (LTV ratio). This is the relationship between the amount of the mortgage and the assessed market value of your home. It is used by mortgage lenders to determine the risk factor of approving a mortgage.
The larger your down payment, the better your LTV ratio will be and will demonstrate to the lender that you are financially successful in the gig economy. Besides, it will save you money as it will not only reduce the size of the loan you require but also your interest rate on the money you do borrow. A healthy down payment (20% or more) will also eliminate the extra cost of private mortgage insurance (PMI).
Improve Your DTI Ratio & Credit Score
The next most important thing that lenders consider is your debt-to-income ratio as it measures your ability to manage your monthly payments and repay your debts. To that end, work to lower your DTI (debt-to-income ratio) either by increasing your gross monthly income like taking up another part-time job or reducing your monthly debt.
Also, make sure you pay your bills on time and use your credit cards efficiently as it is a key factor in keeping your credit score high. Lenders not only consider your debt-to-income ratio but also your three-digit credit score when considering your mortgage application. If your debt-to-income ratio is low and your credit score is high lenders will be more than willing to consider you for a mortgage even if you are a gig economy worker.
Pay Your Taxes
Lenders lean heavily on your tax returns to verify your income. You need to file your taxes on time and adequately. If you work under the table like some gig economy workers to avoid taxes then the absence of regular paychecks can lead to problems. Besides, self-employed people, as gig economy workers, usually use a Schedule C when they file taxes to report income and deduct numerous expenses to show work expenses. This will reduce the profits on paper and reduce your net income, which will not be favorable to your mortgage application. You should balance your income and expenditure properly to show a very good net income.
Work On Getting Pre-approved Or Prequalified
You should work on getting a pre-approval or pre-qualified letter before bidding on a house. It will help you identify any qualification issues and give you an indication of how much money you can borrow. It will also prove to the seller that you have the cash to back up your offer and ease their concern when deciding between competing bids.
Prove Your Income Stability
You should show a stable income by producing bank statements that show that you earn a reasonable living every month. You should also be able to explain why you are working as a freelancer and that your hourly or project rate is high enough to compare with a 40 hour-a-week (or full-time) income. If you provide at least two years of steady income, it will help you qualify for a mortgage.
Consider a “Bank Statement” Mortgage
You could try for a “bank statement” mortgage. This is a recently emerging option for the gig economy and self-employed workers, as they review 12-24 months of deposit to one bank account and profit and loss statement of your business instead of W2’s or payroll checks.
Get A Non-QM Loan
You could consider getting a Non-QM loan. Non-QM loans are for homebuyers who do not qualify for a conventional or traditional mortgage and have unique income qualifications. You can qualify for this type of loan even if you do not have a steady income, an excellent credit score, or a low income-to-debt ratio. These programs use alternative income verification and flexible underwriting guidelines.
Click here to learn more about Non-QM loans.
Call Us today to get things started and learn more about the home buying process. The initial conversation is a no-obligation call and can help you get an insight into what you need when you are ready to buy a home.