Trying to qualify for a mortgage can feel like a giant document drop that includes everything but your high school report card, all to prove to the lender that you’re a good credit risk. For people with a consistent employer, showing your employment history is one of the simpler elements. But for freelancers, gig workers, and independent contractors, it’s a little more involved. Fortunately, lending institutions are meeting the demands of this rapidly expanding demographic in our job force. New research shows that 44 million workers — about 28 percent — were self-employed at some point in 2019, and 14 percent were independent contractors as their primary job. According to projections, by 2027 50 percent of the total U.S. workforce will be freelancing at least as part of their income.
With that shift in mind, lenders have developed their own criteria for accommodating independent contractors. Most lenders will require at least two years’ worth of steady self-employment income in order to qualify for a home loan. They typically classify any prospective borrowers as “self-employed” if they own 25% or more of a business or are not W-2 employees.
While two years of documented self-employment history is preferred, lenders will offer some flexibility on this point. If you can show that you have two years of job history in a similar job, they will accept one year of work history in your current independent contractor role as long as you are earning as much or more than you were in your previous W-2 position. While there is some flexibility, if you’ve been freelancing for less than a year, you probably won’t qualify for a home loan.
Apart from your employment history, lenders will also want to see the following items, which are pretty standard for contract workers and W2 employees alike. They will want to see:
- Your credit score
- Your credit history
- Your debt-to-income ratio
- Any other assets, including your savings
Lenders will also require a thorough look at the property you plan on purchasing, which typically includes an appraisal of the property.
Taxable income
When it comes time to file their tax returns, independent contractors will generally try to reap as many tax deductions as possible via their business expenses. The only drawback to this is that when you’re applying for a mortgage, lenders will only consider your taxable income. If there’s a big disparity between your gross income and your taxable income, that will significantly lower the amount you’re eligible to borrow.
Some self-employed borrowers have been able to circumvent this by applying for a mortgage called a bank statement loan. This type of loan allows you to use all of your gross income when you apply. There is a drawback here, however. Bank statement loans are considered non-qualified mortgages, which tend to have higher interest rates and they also offer fewer consumer protections than traditional mortgages. Not all banks offer them, and they are not available with low interest government loans such as VA or Federal Housing Administration loans.
As a result, most self-employed borrowers stick to mainstream loans in order to save on interest rates, even though that usually qualifies them for a lower amount.
