- As I’ve started earning more money as a freelancer and seen houses come on the market that I could afford, I decided to get pre-approved for a mortgage this year.
- The pre-approval process for freelancers wasn’t as challenging as I thought, and I learned being a freelancer doesn’t have to preclude you from getting a mortgage.
- However, changing the structure of my business last year made things a little more complicated, and I wished I’d ordered a credit report before going through the process.
- Read more personal finance coverage.
Living in Los Angeles, I had reason to believe that I would never be a homeowner. At least not in my stomping grounds, where the median price of a home hovers at $698,000. But after I started earning more as a freelancer than I ever did working a 9 to 5, I was curious if buying a home was in my cards. And when some homes popped up in my neighborhood that were going for less than the market rate, I went about getting pre-approved for a mortgage.
Here’s what I learned about the pre-approval mortgage process for self-employed folks:
It wasn’t as hard as I thought
I had heard a number of horror stories from my freelancer colleagues about how tough it was to buy a house when you freelance. Even if you make a decent living and have stellar credit, lenders might be wary if your income goes up and down.
It makes sense: If you don’t have stable employment, you’ll have a harder time paying off your mortgage. Some of my self-employed friends have told me that lenders might make you jump through more hoops and provide extensive documentation, statements from CPAs that had to be on the firm’s letterhead — that sort of thing.
It turned out to be fairly simple process. When I talked to Mike Carpenter, a loan officer and founder of Mike the Money Man, he said the main difference between getting pre-approved for a mortgage when you’re self-employed and when you have a traditional job is how you go about showing proof of income. Whereas 9-to-5ers might be asked to provide paycheck stubs, freelancers are asked to submit tax returns. To get started, I was asked to gather and submit the following:
- The last two years of personal and business tax returns
- Copy of government-issued photo ID or driver’s license (if you’re married, you’ll also need to provide your spouse’s)
- The most recent two months’ statements or most recent quarter’s statements of all your assets. This includes checking and savings accounts, 401(k) accounts, retirement funds in other accounts, stocks, and other cash assets.
Next, my loan officer ran a credit check. And that was about it.
There might be exceptions to the requirements
It turns out that guidelines for self-employed folks have become less stringent. While two years’ of tax returns is the standard, in some cases you might only need one year of income tax documents. For instance, if you can only provide last year’s tax returns, if your income is on par with what others are making in your industry, that might suffice.
Another exception: If you are able to provide the last two years of your individual tax returns, you might not need to also provide two years worth of business tax returns. That’s if you’re using your own funds for the down payment and closing costs, and if you satisfy the reserve requirements; if you’ve been self-employed for at least five years; and your individual tax returns show an increase in income over the last two years.
Order a credit report beforehand
This was one of those things that I knew I should have done, but didn’t get around to. In retrospect, I wish I had ordered a credit report and looked for any errors ahead of time.
When my loan officer showed me my credit report, I was surprised to find certain things had negatively impacted my credit. While there were no errors, I wasn’t aware that the few times I had my credit pulled accounted for too many in a short period of time, and had dinged my credit. Granted, I had bought a car, applied to move into a new apartment, and applied for a business credit cardwithin the last 12 months. Looking back, I could have waited a bit longer before getting pre-approved.
Setting up as an S-Corp can affect the mortgage approval amount
My loan officer pointed out that because I had set up my S-Corp just last year, I would need it set up for at least two years for that income to count. Because I only had one year of filings for my business, I wasn’t approved for as much as I would have liked. In turn, I’ll have to wait another year to go through the process again.
To figure out how much I’ll need to earn to qualify for a certain amount, Carpenter sent me a debt-to-income spreadsheet, and the money nerd in me has played around with from time to time.
Work with a loan officer you know and trust
In getting a taste of the mortgage approval process, I learned how important it was to work with someone you can rely on and trust. I had a million questions and my loan officer, who I met through a friend, took the time to answer every single one of them.
Along the same lines, you’ll want to ideally find a loan officer who has a lot of experience working with first-time homeowners. You might have an easier time with the process than, say, with someone who specializes in foreclosures, or homes that are bought for investment purposes. Different realtors and loan officers have varying realms of expertise.
I ended up deciding not to go ahead with underwriting after finding out how much I was likely to be pre-approved for, and wait until next year instead. All in all, though, I was surprised by how simple the pre-approval process for a mortgage was. Should I do it again, I won’t feel discouraged or find it to be daunting.
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