Why is the Home-Buying Process Different for Freelancers or Independent Contractors?

The majority of the home-buying process is the same for everyone. You’ll complete the same applications, get your credit score verified and disclose debt and assets. What’s different is the process of proving your income.

Mortgage lenders need to verify how much a borrower is earning and a history of earnings. For traditionally employed prospective buyers income is predictable. Employed buyers have a salary or an hourly wage and work the same number of hours per pay period. With Freelancers or Independent Contractors, the income can be inconsistent. Variable income is averaged from the prior two years so lenders can predict future earnings.

What Do Freelancers or Independent Contractors Need to Prove Income?

 Typically, lenders want to see at least two years of income history. These are a few examples of documents you might need to provide:

• Employment verification in the form of letters from clients or a licensed CPA, proof of licenses you hold and evidence of insurance for your business.
• Income verification through at least two years of personal tax returns along with two year of business tax returns. If applicable, bank statements, and profit-and-loss forms.

How Can Freelancers or Independent Contractors Improve Their Chance of Being Accepted?

The biggest issue that lenders come across with Freelancers or Independent Contractors are the amount of deductions taken on tax returns. Lenders must use the net income (after all deductions) reported to the IRS. Taking extensive deductions could cause the net income to be too low to qualify for a mortgage. 

As it is with traditionally employed buyers, lenders are going to look closely at your credit score, credit history and current debts. They will also consider savings or assets, which can be used for a down payment and cover closing costs.

 Tips for Increasing Your Credit Score 

• A high credit score can prove to lenders that you’re able to repay a loan. Check your credit score to make sure there aren’t any errors – and correcting them if there are.
• Make sure you don’t open any new credit lines, including credit cards, car loans, or anything else.
• Do not close any credit card or other accounts right now. Even if you have a credit card you haven’t used in years, don’t be tempted to close it out. Doing this can affect your credit utilization ratio, which affects your credit history.

 Owning a Home Isn’t Just a Dream! 

 The Park Square Home Mortgage team is here to answer any questions and help you through the new home buying process.