If you are part of the gig economy and are thinking about applying for a loan for a new house, the process to qualify for it can feel like it is only possible when you have an office job or a business owner.
Despite the increasing number of self-employed and freelance workers in the country, many people are still confused about the process of getting a home loan for the self-employed, freelancers, and contractual workers. The risk and volatility of their careers make them hesitant to even consider applying for a loan. You have to go the extra mile to prove that you have a steady stream of income and that you can keep earning enough money for the foreseeable future.
Here are the aspects you need to know when applying for a loan as a freelancer.
1. Know and understand the requirements
Being a freelance worker is not a deterrent to buying or refinancing a home. But because lenders are responsible for ensuring that a borrower can finance the loan sum demanded, they need proof of stability. Independent workers are not eligible for worker’s compensation in the event of an injury or accident. Therefore, lenders want to ensure that these borrowers have a consistent and continuous source of income from their freelance job for at least two years. This is why you need to secure proof that you can maintain good financial health.
2. Keep an eye on the debt-to-income ratio
The debt-to-income ratio or DTI represents a worker’s monthly debt loan in relation to their gross monthly income. Thus, to assure that the borrower can afford the payments on a given property, lenders need to see a DTI ratio of at least 43 percent or below before approving a mortgage.
3. Increase your chances of getting approved
Any credit applications, including that of a mortgage, are subject to credit checking. Thus, your odds of getting approved for a loan lies in having a good credit score. An excellent place to start is to cut back on write-offs and deductions. Also, to ensure and improve credit, consider these measures:
- Make timely payments on your bills
- Consider getting more gigs for extra income
- Use your cards wisely and avoid taking on additional loans
- Close inactive accounts
4. Make a down payment of at least 20% or more.
The economic disruption caused by the pandemic has dramatically affected the money lending community and its process. Many lenders demand and require a higher down payment from those applying for mortgages and other loans, whether you are self-employed or a regular worker. The higher the value of an estate, the less likely a creditor would approve the loan. However, if a borrower invests a large sum of money in the purchase upfront, the bank would consider the borrower less of a risk.
5. Document everything and keep those receipts
When it is time to collect, arrange, and submit the additional documents needed by the creditor, being a meticulous record keeper can come in handy. This will make the process faster and less of a hassle for both you and your lender. Thus, make sure you have the following:
- Bank statements
- Assets and properties
- List of loans and monthly contributions
- Additional revenue streams
- Proof of your company or employment
6. Consider a joint-mortgage
Another way to increase the chances of being approved for a home loan while you are self-employed is to have a joint mortgage with a co-borrower who is a W-2 employee. They could either be a partner, a significant other, or a close acquaintance. Applying with your co-borrower assures the lender that you will be able to repay the loan consistently.
7. Choose the right lender
The last step to consider is the lender. Since you will most likely be repaying your debt for a lengthy period, it is essential to find a lender that suits your preferences and fits into your budget. Keep in mind that this legal binding represents the most significant long-term debt obligation of your life. Thus, securing the most favorable mortgage rate will ease problems that may arise primarily in the long term. Remember, the planning and preparation process will make all the difference.
Getting a mortgage for self-employed individuals does not require special requirements or complex additional steps. The only tricky part is documenting your income to prove that your cash flow as an independent earner is continuous and that the payment for your house is uninterrupted. As long as loan guidelines are adequately met and your income remains reliable and steady, getting your dream house as an independent contractor is possible.