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Qualifying For A Mortgage As A Freelancer – An Exercise In Patience.

For just about two years now I have been working from home, and 80% of my work & income has been from freelance jobs. This includes my own websites and blogs, consulting on additional ones, any design work I have done, etc…the other 20% is from a company I am still on payroll for in Los Angeles. Now that we have started looking at real estate to buy, we went ahead and visited a recommended mortgage broker last week. I was not a happy camper after our meeting.



Turns out that most banks will not even begin to look at my 1099 income for the year as it cannot be proven, no matter how much paperwork I can provide. Sure, I kind of understand – but it is 80% of my income for the year! The banks don’t really allow stated income loans anymore due to the fact that so many people took on bigger mortgages than they could actually afford, and this could really hurt our chances at getting the loan that we want. So they want to see my W-2 from the job in Los Angeles, my wife’s W-2′s from her 2 jobs this year, and our 2007 tax return – and that’s it. Even though I made double from my freelance work in 2008, it doesn’t matter – they won’t consider it. I joked with the broker that I would be more likely to get the mortgage we want if I had worked at McDonald’s all year and received a W-2 from them…and she agreed. So a guy flipping burgers all year is more likely to get a mortgage than a guy who makes a lot more than that but receives most of his income on 1099 forms. Fantastic! The broker stated this is mainly because lending practices have really been tightened up in this market, and it is hurting buyers that do freelance work/have undocumented income until their taxes are filed. Sure, we can wait until we file our 2008 taxes and they can then use those numbers, but that is at least 6 months from now. So frustrating!

I asked about putting together an overall financial statement, documenting all of our account balances, debts, etc, and she said it could help but it doesn’t replace the need for a W-2 form. My wife and I have excellent credit – in fact, my score was 723 last time I checked – and the only debt we have is one car loan and my wife’s student loan bill. She is a teacher, so her income is not exactly ground-breaking, and my W-2 accounts for only about $20K of my income for the year. Put those two together and it shows we make only a percentage of what we actually do…yet getting the mortgage we want might be very difficult. Only time will tell, I suppose. We are turning in some additional paperwork next week and they will see what they can do for us, and I will be doing a lot of research on my own to look for ways around this issue. This is where I need your help, if you have any experience with this type of situation…has anyone had to deal with this when getting a mortgage? Does anyone have any advice for us? Sure would appreciate the help!

Photo by JCardinal18

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Comments (39)

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  1. I don’t have any personal experience with this, but would it help if you showed the mortgage company all the different sources of income you have? If the mortgage broker lost HIS job, he would be scrambling like crazy because it’s probably his only source of income. If you lost one of your sources, you’d just go find another one! In reality, you’re probably more stable than HE is.

    Good luck and hope everything works out soon.

  2. Miranda says:

    I did this very thing last year. Just after banks started restricting stated income loans. My lender was willing to accept an “income audit” from a local accountant. I had to provide an income statement, my bank account stuff (I highlighted the deposits from business income to make it easier), and references from people for whom I do regular freelance work. I also turned in the 1099s I did have, and my PayPal monthly statements of deposits from clients. It cost me about $600 for the accountant to do this. However, depending on how in-depth your lender wants, it can be as much as $1,000 or $2,000 (or more) for a complete audit.

    Ask your lender if an income audit will work. I was able to get a prime rate on my mortgage by going this route, and it was done as a traditional 30-year fixed. You may need to shop around if you are having trouble at one place. Try to find a local lender — they are often more willing to work with you, especially if you show you are a stable member of the community.

    It’s not really about what the mortgage broker is willing to do, but more what the lender’s underwriting department is willing to accept. And right now, underwriters are being rather hard-nosed about it.

  3. David says:

    Ron and Miranda – You would think that it would, but according to the broker it won’t. Weird, huh? But Miranda, what you mentioned might work at a local bank, just not with big lenders, especially in a community as small as the one we live in. Will check with the bank sometime soon, but as for now we are not going to work with the broker unless we wait until 2009 to get pre-qualified (after our 2008 taxes are filed).

  4. If you use a local brick and mortar bank for your freelance deposit and expense transactions, and if that bank originates its own loans, go directly to that bank and meet with their loan underwriter. They might be more interested in your mortage business. It worked for me in the past, shortly after I started a new business and had irregular income.

  5. Julie says:

    I agree with the local bank comment. My husband and I keep seperate accounts–his at his local hometown bank and mine at a well-known national bank. When we were recently financing a home equity loan for a remodel, we went to both to see what they had to offer.

    My husband has had his account at his small, hometown bank for 25 years and the vice-president of lending, who we worked with, went the extra mile to help us out and we got 95% home equity loan which is practically unheard of anywhere.

    In comparison, we went to the large, national bank, who I thought would have a better offering, and they were only willing to do 85% of our equity and the payment terms were much stricter.

  6. Katharine says:

    David, you’re right: It’s going to take patience. The problem is the current state of the U.S. economy, the banking and financing industry, and the housing industry.

    I’ve been a full-time freelance editor in New York State for almost 14 years now. Several years ago, my husband and I sought to refinance our mortgage so that we could get a lower rate. We’d obtained the original mortgage when we were both W-2 employees. But by the time of the refinancing, I’d been self-employed for about 5 years. Proving my husband’s income was, of course, not a problem. For me, we had to provide 2 years’ income tax returns, my Excel table of receipts from clients for that year, and my projected earnings for the next year. And the bank, a large national one, was fine with that.

    I’d hate to be trying the same thing now, especially because my husband is now also self-employed (as a cabinetmaker). But the economy will eventually turn around. Meanwhile, keep saving.

  7. david says:

    We most certainly will Katharine, and we are even considering postponing the entire thing while we save up an even bigger down-payment. We shall see!

  8. Miss Thrifty says:

    Ha – tell me about it! We had exactly the same problem when we went househunting here in the UK. We had to use all our wiles to get a prime mortgage, but we got there in the end. Our solution: we put my mother-in-law on the mortgage (and our lawyer drafted a document stating that she had no financial claim on the house). She’s paid off her own mortgage, so her income was enough to swing ours. Result!

  9. alexis says:

    my husband and i have had the same problem when looking to purchase investment properties – we are both self-employed, so we don’t even have one income that’s “steady.” we also both have good credit, virtually no debt except for mortgages on other investment properties, but basically what it comes down to, i think, is patience, persistence – and probably luck. we were able to purchase one property thru a private note where the original owners were still carrying the mortgage, and that worked out great.

    the thing is, no matter how much you make – unless it’s so much there’s NO WAY you could default or whatever – banks aren’t happy b/c you can’t “prove” it. we’ve also had this problem when looking for a new apartment to rent. a hassle, yes, but i wouldn’t trade being self-employed and i’m sure you feel the same way!

  10. Slinky says:

    Find somewhere that does manual underwriting.

  11. Yan says:

    You are probably just caught in bad timing since getting a credit (especially mortgage) has become tougher with all the declining real estate valuations

  12. David says:

    Thanks everyone, I appreciate you taking the time to comment and let me know your thoughts on this!

  13. Michele says:

    20 years ago I had owned my own business for one year. I happened to be driving down the street and stopped at a garage sale. They fellow hosting the sale was also selling the house. There was a sign up which said, “This home for sale by owner, see David.” I said, “How much you want?” He said, $50,000.” I said, “You finance?” He said, Yes.” I said, “I’ll take it!” No Realtor and No bank.
    He took a chance on me and it all worked out. I’ve long since paid off the loan And he got about 2% more for his money.
    I paid a premium for the money but I got a house. And after about 5 years I refinanced at a lower rate and paid him off completely.
    David was an angel in disguise. I realize that now much more then I did then. But here’s a thought. The stock market has been awful the past year. And I’m not convinced it’s going to get a whole lot more stable or profitable any time soon.
    So look for someone who is selling their house and willing to finance it. Show them the proofs of your income that the bank won’t look at. If you offer someone 7% or 7.5% on their money that’s a good deal for them AND it gets you into a house.
    You don’t have to borrow money from a bank. You CAN do owner financing. It’ll take longer to find someone who will finance their house for you but it’s better than not getting a house at all!

    My $.02 worth.

    Michele

  14. David says:

    Definitely something to consider, thanks Michele!

  15. dale siegel says:

    I am an attorney in NY and own a mortgage company. I have a few thoughts:

    1. FNMA no longer does stated income mortgages, but FreddieMac does. If your credit score is over 700 and you are puttling down at least 20%, you can still go stated. However, you cannot also include you W-2 income and your wife’s W-2 income. You will have to qualify on your own “stated” freelance income alone. You will also have to be self employed for at least 2 years.

    2. If you have one freelance client that pays the bulk of your income for at least 12 months, they might consider that as “salary” income. We have done loans for freelance writers that work for mainly one magazine or publication and used the income from there.

    3. Go to a Credit Union or B lender (there still are some) and show your last 12 months deposits into your account, W-2′s paid invoices, etc.

    Of course you can still get a loan. With good credit and a large DP, there are plenty of good options out there for you!

    Dale Robyn Siegel

  16. David says:

    Thanks for the tips Dale, will def. keep them in mind as we move forward!

  17. Why not setup your own corporation / LLC and have it invoice all of your customers. Then have the corp / LLC pay you as an employee (and issue a W2). This would take awhile to setup and I’m not sure how the underwriters would view it, but it may be a viable future option. On the other hand, it may increase your tax liability due to double taxation. Something to talk over with a tax professional.

  18. david says:

    Adam – yep, you nailed the 2 biggest reasons right now. 1. Time and 2. Tax issues that need to be sorted out before I could do that. I wish I could right away though!

  19. [...] Qualifying for a Mortgage as a Freelancer.   As more of my income is derived from freelance work, I have my own concerns for qualifying for our next mortgage. [...]

  20. Arfa says:

    Unless line 22 ( Total Income) or line 37 (Adj. Gross Income) on the 1040 from your 2006 and 2007 tax returns is enough to qualify you for your house, you are going to have to do 1 of 3 things. (1) Wait ’til next year when you can show another year’s worth of tax returns – enough income to qualify, (2) Find a bank/broker that will allow you to qualify on your bank statements for the last 12 months showing sufficient deposits to justify the income you are claiming, or (3) Find a bank/broker that will allow you to qualify on a stated loan – and as someone above mentioned, these programs are becoming farther and fewer between. Countrywide may still have them, Indymac is gone, Homecomings is gone (as of this week), and many other smaller banks/lenders are out of business, or have scaled back on their underwriting guidelines to not allow for stated income loans.

    As a self-employed borrower, your problem may be that for ever dollar you claim for gross income (before adjustments), you may be writing down 90 cents (adjustments), only leaving you with 10 cents of Adjusted Gross Income (AGI). The bank looks at the 10 cents of AGI as what is left over to pay bills with, such as principal, interest, taxes, and insurance (PITI) on your new home.

    First – check your income taxes and ask the bank if they will qualify you on Total Income (line 22) or Adjust Gross Income (line 37). Also ask the bank if they add anything back to that income, such as depreciation and amortization, in order to get to your qualifying income. Then show them your tax returns. If you can’t qualify, ask them which line on the 1040 they use, and how much needs to show on that line in order to qualify for the house you want. Now that you know your target income, you can decide which direction (1,2, or 3 above) to follow.

  21. David says:

    Wow Arfa, great and very valuable tips. I will be sure to keep these in mind as we move forward on our decision on what to do next! Thanks!

  22. [...] Qualifying For A Mortgage As A Freelancer – An Exercise In Patience. Mortgage companies have tightened the purse string in recent months, making it more difficult for some freelancers to obtain a mortgage. [...]

  23. [...] Two Dollars needs some advice on how to get approved for a mortgage when most of your income is freelance.  I never would have imagined that this would be a problem, but it just shows that your credit [...]

  24. This post is definately enlightening so thanks for sharing your experiences. It seems many freelancers can do well for themselves but continually need to figure out how things work by trial and error. Your story makes it apparent that as a freelancer, it’s better to prepare for the expected than to leave it to chance and have to wait for your tax statement to prove you make a good living.

    Good luck with your endeavors.

  25. [...] is sadly misnamed. And speaking of financing real estate, My Dollar Plan wonders how to go about getting a mortgage when the largest part of your income is from freelancing; though I thought it was impossible, several of his readers offer solutions.  Well, speaking of [...]

  26. [...] My Two Dollars: Qualifying For A Mortgage As A Freelancer – An Exercise In Patience [...]

  27. [...] 7.  My Two Dollars:  Qualifying For A Mortgage As A Freelancer – An Exercise In Patience [...]

  28. Alicia says:

    I did this last year. Self employed, wanted to buy a place, no proof of income such as a W2. ( Ended up going with a stated income loan with a higher interest rate which I plan to refinance.)

    The bank was willing to lend to a no proof of income person if a. you had money in the bank (i.e. 20% down payment) and b. could prove deposits. This didn’t work for me because I didn’t have 20% and I used mostly cash to pay or everything so didn’t have a lot of deposits to show. However, try a lot of different banks, not just a broker. Try a broker, an online broker, your bank, your wife’s bank. Someone will lend you the money. If you are only interested in working with that particular broker, you limit your options.

    I do recommend having money as a down payment before you shop for a loan since it makes you look as though you are more responsible. Good luck and don’t give up.

    Remember that too many people used stated income loans in unethical ways, that is why it is hard for us people who need them to get them.

  29. [...] Two Dollars – Qualifying for a Mortgage as a Freelancer – An Exercise in Patience.  Takes a look at the challenges of qualifying for a mortgage without regular, varifiable income [...]

  30. [...] house for sale – but we are not buying anything just yet. Between house prices still falling, the difficulty of getting a mortgage with freelance income, and our idea of finding a vacation cabin to buy, we are going to rent again. And we just signed [...]

  31. Brendan X. Byrnes says:

    This issue will not even cause a blip on the radar screens of our elected officials. I ran into the same problem. My wife although she had excellent credit ( mine was good) is a working actress, constantly doing film, commercial, industrial training videos print and voice over work. We write off a lot , all legally, but what’s good at tax time during these tough times is not good for qualifying for mortgages. Just another example of the system squashing entrepreneurship. This issue requires fundamental changes in how the FHA and Gov. agencies work. I am not optimistic. Any one want
    to band together and help alert the new administration- let me know.

  32. david says:

    I agree Brendan, it’s not pretty. We have put off looking to buy for a bit, but we were disappointed that for as much as we made, the mortgage brokers and bank didn’t care.

  33. Colin says:

    David – The incorporation idea is actually a pretty good one. Taxes are honestly not an issue. If you incorporate as an LLC or an S-Corp and you’ll be taxed as a pass through entity by the feds (double check to make sure that the state you’re from will tax you as a pass through entity, as well – most do). It does take some time or money to incorporate and to maintain the entity you’ve created. However, think of it as the cost of buying a home.

  34. David says:

    Absolutely, thanks Colin. We did decide to put it off for a bit, but hope to make the decision this year. Thanks!

  35. [...] If you are a first-time home buyer and buy a house in before December 2009, you can take an ,000 tax credit that you don’t have to pay back. This is one that I would like to take advantage of, if we can find the house we want AND we can get approved for a mortgage while I am self-employed. [...]

  36. [...] Two Dollars – Qualifying for a Mortgage as a Freelancer – An Exercise in Patience.  Takes a look at the challenges of qualifying for a mortgage without regular, varifiable income [...]

  37. [...] Qualifying for a Mortgage as a Freelancer [...]

  38. Samantha Verou says:

    I just tried a goole search for the term “freelancer mortgages” in the United States and to my surprise you don’t have any specialist mortgage brokers that help freelance contractors with mortgages. We have lots of networking sites just for freelancers that provide information ranging from mortgages, pensions, tax advice to legislation governing freelancers. There seems to be much more support for us over in the UK.

  39. Jason Maurer says:

    Bumping this article. Any new insights in the last year and a half? Has home financing for freelancers only gotten worse? David, did you ever buy a home?

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