how to apply for a mortgage if you’re a freelancer

How to Apply for a Mortgage if You’re a Freelancer

Applying for a mortgage as a freelancer can be far more challenging than applying with a day job. Even if you make more and have excellent credit, lenders are much more detailed and strict when it comes to applying while self-employed. But, it’s not impossible! Here are some tips on how to apply for a mortgage if you’re a freelancer.

How to Apply for a Mortgage if You’re a Freelancer

Irregular incomes creates lender risk

Loans to self-employed folks are seen as a risky bet for banks. The reason is because even if you have made a consistent amount over the last six months, your income may change in the blink of an eye. Because of this, lenders make sure to work through the application with a fine toothed comb to ensure you’re a solid candidate for a mortgage. Additionally, if your business is less than 3 years old, you will need to provide letters of explanations and additional documentation to prove income.

Tax deductions can hurt you at loan time

Claiming your income as a freelancer can be tricky. If you claim a lot of business expenses to reduce your taxable income, you could raise a big red flag with mortgage lenders. So while writing things off for taxes is a perk as a freelancer, it could cost you when trying to buy a home. As a freelancer, lenders will calculate your average monthly income by dividing the last two years of adjustable gross income by 24. Since lenders aren’t using your gross income, this could appear less than it really is. So less income in turn lowers the amount of the mortgage for which you may qualify.

So, Here Are Some Critical Steps to Take

Prepare in advance

As you know, being self-employed requires business documents, profit and loss statements, tax documents, etc. Having all of these ready to go when you apply can show that your business is legitimate, profitable, and sustainable which makes you look more attractive to a lender.

Separate business and personal expenses

Don’t use a personal account towards your business, or vice versa. This will help lenders track deposits and expenditures, which can help you prove your business income. Additionally, this will help you accurately track your year over year profits.

Down payment

As is true for a regular buyer, saving up a sizable down payment makes you a less risky borrower, and can help you qualify for a loan.

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