Are you a freelance independent contractor? Do you get paid with 1099s? Scared to apply for a loan? While slightly trickier, you still have a great chance at your dream home.
You will need to submit the following for pre-approval:
- Two months of bank statements from all accounts (personal and business accounts)
- Two years of tax returns (FYI, I've seen some lenders base their decision on one year tax returns when you're going with a Freddie Mac loan. Speak with your lender about your options.)
- Asset Statements (401K, Brokerage Accounts, Mutual Funds, Stocks, etc)
- Proof of funds for your down payment (This may be the same as your bank statement, but may also be a gift letter from your family if they are giving your money for your down payment)
- Profit and loss statement - they will ask you for this before closing, so make sure you have it ready.
- Business explanation - They will also likely want you to explain the type of business that you do and want to make sure that you still have the type of income coming in that is reflected on your tax return.
- Some lenders may ask you to itemize each 1099, list dates of jobs, etc. If you are in the entertainment business or have a lot of different projects, this becomes tedious. You may want to see what other lenders are available, as I've seen some lenders not require this.
Plan ahead with these handy tips :
1. Be careful with the deductions you choose to take on your taxes.
Tell your accountant or tax professional that you want to buy a house within the next two years. They will be able to balance the write-offs that you take versus having a high enough net income after deductions to quality for a mortgage on the house you want. The lender will average the two years of net income on your tax return to get your average annual income. This is the amount they will use to qualify you. Your other option is to look at a bank statement loan which would look at your gross income vs net income reflected on your tax returns. Bank statement loans do have a higher interest rate, so you would need to balance the cost of the higher loan versus the additional taxes you would pay with less write-offs.
2. Pay off those major business expenses on personal credit cards
This may raise your debt to income ratio to a point where you may not quality for a loan.
3. Build up cash reserves
Lenders may be more wary to lend to someone without a steady paycheck, so have a good amount saved up in reserve. Show the lender that you can pay the mortgage for a few months even if you don't land that next gig.
4. Consider a less expensive home
Buying under your means will ensure that you can meet the mortgage payments even if you have a dry spell in your business. Your lender will likely feel more comfortable lending if you have some leeway in your bills.
5. Understand that your cost of lending may be higher
As a contractor with variable income, you may be a higher risk and lenders charge accordingly. In addition, you will need to pay for private mortgage insurance if you have less than 20% down. If your credit rating has taken a hit in the past due to your variable income, the amount of PMI may actually be higher for you.
6. Put your best foot forward
Before you apply for a loan, double-check your credit rating on a website like credit karma. Make sure that there is no erroneous information on your credit history. Showing credit good habits is essential to keeping your cost of borrowing down
7. Use a smaller, more flexible lender
Going with a smaller bank or mortgage broker versus a larger bank may also make both the process easier and ensure that you get approved for final approval to close. They may have more leeway in the underwriting process and be able to get you approved.
8. Beware of Pre-Approvals.
Not all pre-approvals are equal - I've seen friends in the entertainment industry work with banks or credit unions that market heavily to entertainment folks. They were pre-approved, yet their loans fell apart when those lenders started digging into their paperwork a little bit more. They were not able to close on the house through no fault of their own - just imagine that heartbreak. If you had released your financing contingency by this time, you would have lost your earnest money deposit. Be careful who you proceed on a loan with and ask around for recommendations. I have suggestions on great lenders.
*Disclaimer: please consult with your accountant or tax advisor. This article is for informational purposes only.
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