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Getting a Mortgage
As a Self-Employed Individual
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How to qualify for a mortgage as a freelancer?
When you are a self-employed person working as an entrepreneur, things are usually more busy for you than for a W-2 employee. Getting a mortgage loan as a self-employed person adds to your busy schedule as you need to navigate through the lengthy bank process that makes sure that you have the means to pay back the loan.
As a freelancer, you have multiple clients and gigs to shuffle between, so lenders are always more conscious when sanctioning mortgage loans to self-employed individuals.
Compared to a W-2 employee, it's also much more challenging to get a mortgage as a self-employed person. Because lenders need to confirm that you have a steady income and will be able to pay your monthly mortgage payments, for this reason, you'll need to submit a larger heap of paperwork when applying for a mortgage loan.
Here we'll look at the things you need to take care of to increase your chances of getting a mortgage loan.
Table of contents
Key Takeaways:
- There are steps you can take to boost your chances of getting a mortgage loan.
- There’s a correlation between loan-to-value ratios and the ease of getting a mortgage loan.
Why is it difficult to get a mortgage loan when self-employed?
A self-employed individual has several sources of income, and these income sources are not necessarily equal.
For example, if you have six clients that pay you a total of $6,500 each month, there's a high chance that all these clients don't pay you equally. Also, some clients might only stay with you for a limited time.
For instance, two clients might only be working with you for two months and then drop off, which makes a dent in your income and brings it down to $5,200 for a month. In addition, a lender will seek your bank statement and income tax return over the past years before loaning you a mortgage amount.
A fluctuating income is usually not good news when looking out for mortgage loans, and you'll have to provide more paperwork to lenders to gain their trust. So, it's about trust and proving that you are an ideal mortgage candidate. Whether you're an artist, social media influencer or delivery driver, it still can be tough to prove your income. If you have any proof of your making estimated tax payments, this can also help.
W-2 employees have significantly less difficulty because they can submit their W-2 tax returns for a loan. And a W-2 employee's income is much more stable than a self-employed individual's.
As a self-employed individual, you can have more significant business deductions to lower your taxable income, but it shows less income on your return which is not favorable for getting a mortgage loan.
But, it's not impossible to buy a house when you are self-employed. It's much easier in some cases. If your loan-to-value (LTV) ratio is lower, it will be much easier for a lender to sanction a mortgage loan.
A LTV ratio is the measure of risk associated with lending. The lower your LTV ratio, the more likely you’ll get a mortgage loan.
Quick tip
Always keep your profit loss statements, bank statements and income tax return filing handy – you’ll need them when applying for a mortgage loan.
How do I become an ideal candidate for a mortgage loan?
Becoming a perfect candidate for a mortgage or self-employment loan isn't rocket science, and you have to keep a few things in mind to increase your likelihood of getting a mortgage.
Let's look at five things that increase your chances of getting a mortgage loan:
Increase your credit rating
Self-employment track record
Contribute a larger down payment
Cooperate with the lender
Large emergency fund
Buying a house as a self-employed individual
Mortgage loans are a great tool to fulfill your dream of buying a house, but you need to put in just a little extra effort as a freelancer and self-employed individual. In some cases, buying a house as a self-employed individual is much easier than buying one as a W-2 employee because you can get more significant capital once you prove your value with documentation.
What’s FlyFin?
FlyFin caters to the tax needs of self-employed individuals, freelancers, gig workers, independent contractors and sole proprietors. When it comes to mortgages, FlyFin can give a fair idea of your return and help you prepare to file your loan.
But anyone can file taxes through FlyFin! FlyFin tracks all your business expenses automatically using A.I. to find every possible tax deduction.
Then, our CPA team files a guaranteed 100% accurate tax return for you – to save you a couple of thousand dollars and a ton of time on your taxes.
Download the FlyFin app and have your taxes filed in less than fifteen minutes, saving time and more money on your taxes than last year, guaranteed.
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