When you decided to freelance as your career path, you know it has many pros and cons. Of course, you enjoy the creativity, time, and freedom being your own boss has to offer. On the other hand, you had to come to terms with the reality that projects would not come in constantly. So do the earnings. Still, you know that you embarked on this journey to pursue something you are passionate about.
At some point, you would have pondered on your long-term financial goals and how easily you can attain them, given your current livelihood. The idea and advantages of owning rather than renting a home might have come to mind. But, most often than not, freelancers are usually plagued with things that seem to limit them from accessing mortgage or any other loan for that matter.
Proof of Income
Regular employees paid on a bi-monthly or monthly basis are issued a payslip that lists their earnings, state contributions, and taxes. On the other hand, freelancers do not have such proof of income. This comes as the foremost challenge when attempting to apply for a mortgage, as lenders typically need to establish that you are fit enough in terms of financial standing to meet regular fees.
Often, the earnings of self-employed individuals are erratic and highly dependent on booked clients. For more seasoned freelancers, who enjoy word-of-mouth referrals in their niche, income might come constantly. Beginners, on the other hand, have yet to establish themselves as an authority in their field. With this, they still have to take dips in their income to test the waters with several clients.
The Health of the Business
For freelancers who choose to register their brand as an official business, lenders would be keener on performance indicators, particularly their financial statements. This is because the corporate route has more liabilities, hence more risks than dispensing money for personal purposes.
Everything may sound a little too fuzzy now, but applying for a mortgage is a big move, after all, a financial one at that. You would want to get your financial records sorted out first. This will help your preferred mortgage loan officer assess if you are currently fit for taking on such a big project.
Getting Past the Income Proof Hurdle
What many may not know is lenders process requests of regular company employees differently from that of freelancers. Think of it this way; tax returns are to the self-employed as proof of income is to employed individuals. It can be as simple as presenting proof of two years worth of individual and business tax returns.
Some lenders would even lower the restrictions to honor a year’s worth of tax returns, provided your income falls within the average amount people from the same industry earn. It would be better a two-year income increase can also be proven. But take note that documenting your income, which comes in different streams, involves lots of 1099 and W-2 form filling.
Are you a responsible debtor?
Another thing lenders will look into is how you pay off pending debt. Likewise, they will check how much debt you take in and whether it eats up most of your income. With these criteria, they can compute your debt-to-income ratio, with 43 at most, giving you a pass in the pre-approval stage.
Will your credit make or break the deal?
Equally important to pass pre-approval is having a good credit score. You can have yours computed for free, but as an extra measure, you can pay for a credit report. From the report, you can gain a better insight into how well you manage your credit and payments you made past their due dates. That can pull your credit score down, making it difficult for you to get approved for the time being.
Still, there are ways to increase your credit score. Perhaps, detect erroneous details on your credit report, like missed payments that were paid on time. Also, you can work around the credit lines you currently have rather than opening new ones.
Of course, you also have to provide the following essential documents for the lender’s perusal and verification:
- Your official government-issued ID and, if married, your spouse’s
- Business license, if any
- Client testimonials
- Savings and checking account statements for the last two months
- Investment account statements for the last two months
- Statements for other assets
The initial steps in acquiring a house can be simple if you’re diligent in paying mandatory government dues like taxes. But add your credit and debt management habits, which can affect how well you will par in the pre-approval of your mortgage. Simply put, lenders take part in your financial obligations once they approve of your mortgage. You would want to present your capability of paying their dues just as well as the others.