Millennial freelancers, independent contractors, and others self-employed in the “gig economy,” now make up at least 34% of the workforce.That’s according to a study by Intuit as cited in CNN Money. They expect to add another nine percent to that number by the year 2020. This includes everyone from Lyft and Uber drivers, to independent millennial creatives such as writers and designers, as well as traditional contractors, such as plumbers and electricians.
While being self-employed brings the freedom of a flexible schedule, many independent workers run into obstacles when they are ready to buy a house. Self-employed home loan denials happen at higher rates than they do for employees with the typical W-2 documented income. This happens for a couple of reasons. First self-employed income can be unpredictable, it lacks the regularity of a guaranteed paycheck, and that’s risky for lenders. Additionally, business owners typically write-off some of their income on their tax returns and that not only makes their income difficult to document, but it can also create a discrepancy between what you think your income is and what you document as your income.
Mortgage Must-Knows for Independent Contractors, Self-Employed Borrowers
The first thing to know is that there is more than one way to document income, so if you’ve already been denied a home loan, talk to a knowledgeable loan officer (preferably a broker, but more on that below) who has experience with self-employed mortgage approvals.
Next, it’s helpful to know that independently employed mortgage borrowers who can document consistent income will be offered the best rates. That’s because documentation creates security for the lender. For a conventional loan, a VA loan, or an FHA loan, lenders will calculate the net income shown on two years of tax returns. So if a borrower has a lot of write-offs, they might not show enough income to support the mortgage payment and the loan will be denied. These types of self-employed mortgage denials are more common at banks and credit unions, versus brokers who have access to many lenders.
If you are an independent business owner, you know that what’s documented on your tax returns is not always reflective of what runs through your bank account. Fortunately, some lenders know this too, and there are mortgage products designed for this scenario. These typically carry a higher interest rate, but alternative-documentation products are a good way for independent workers or freelancer to get a mortgage. Mortgage brokers, such as RoBUSFinancial, may have access to more of these types of options and may have the expertise needed to find the best mortgage loan for self-employed borrowers.
Common Options for Self-Employed Borrowers
Bank Statement Mortgages
Some lenders will consider bank statements as a way to document income, rather than pay checks. Typically, they will average the deposits over a 12 or 24-month period to get an idea of what the actual income is. Depending on the product, they will consider personal or business bank statements, or both.
Asset Depletion Mortgages
Money saved in a retirement or investment account may be considered as income. While the specifics vary, the lender will typically want to see 1.5 to 1.8 times the loan amount. For instance, if the mortgage loan amount was $100,000, lenders would want to document assets of $150,000-$180,000.
Stated Income Mortgages
Stated income mortgages used to be a common way to get a self-employed mortgage loan. Basically, a borrower would simply tell the bank what their income is, and sign on the bottom line. As you can imagine, these loans were quite risky. These days, stated income loans are really only available on investment properties where the future rental income from the property is used as income for the mortgage approval.
Independent contractors taking control of their careers area big driver in today’s economy. Fortunately, there are lenders who understand the nuances of cash flow and the variables of running your own business. An experienced broker, such as RoBUS Financial, can be essential when it’s time to buy your first (or second, or third) home.
If you have been turned down by another mortgage company, or you are ready to explore your home buying options, contact RoBUS Financial to get started todaycall (844) 268-6008.
About RoBUS Finance
RoBUS Finance LLC (NMLS # 1687346) is a direct lender and full-service brokerage. We can handle all types of residential loans: conventional,VA, FHA, and just about any loan that may be turned down by a bank or a bigger lender if it doesn’t meet their guidelines. RoBUS Finance LLC also can provide private capital or hard money loans to 100% of value that can fund fast, and commercial loans for conventional scenarios and portfolio situations that the bigger banks and lenders cannot or will not do.
Restrictions may apply. Not all who apply will qualify. Program qualifications & offerings are subject to change at any time. Equal Housing Lender. RoBUS Finance LLC is licensed inUT, CA, CO, OR, WA, ID, MT, TX, & FL. In California, RoBUS Finance is licensed by Department of Business Oversight, under the California Residential
Mortgage Lending ActLicense #79867. In Colorado, RoBUS Finance LLC is regulated by the Division ofReal Estate. Florida Mortgage Broker License #2502. Idaho MortgageBroker/Lender License #9488. Montana Mortgage Broker License #1687346. OregonMortgage Lending License #5654. Texas Mortgage Company Licensed. Utah Division of Real Estate License #10612745. Washington Mortgage Broker License #1687346
Information contained int his Blog does not constitute legal, finance, or other professional advice or services and should not be used as a substitute for professional advice. The purpose of the Blog is to provide RoBUS Finance LLC’s opinions and general guidance on certain matters related to mortgages. The reader accepts full responsibility for use of the information contained herein.