For gig workers and freelancers, navigating the path to homeownership has always presented unique challenges. The pandemic, however, transformed the housing and financial landscapes further, making it both difficult and opportune for self-employed individuals to secure a mortgage.
If you’re self-employed, you likely have more questions than answers when it comes to navigating your finances to buy a home. This guide will uncover effective post-pandemic mortgage strategies to help gig workers and freelancers take one step closer to owning their dream home.
The Self-Employment Mortgage Challenge
Lenders have historically viewed self-employment with a cautious lens. Why? Because income for freelancers or gig workers is often perceived as unpredictable or inconsistent. Without standard monthly pay stubs, proving your earning potential could be a stumbling block.
After the pandemic, mortgage lenders have tightened their criteria even further, calling for more documentation and heightened scrutiny of financial details. But don’t worry—with preparation and strategy, you can overcome these hurdles and position yourself as a strong mortgage candidate.
Post-Pandemic Mortgage Strategies to Follow
1. Get Your Financial Documents in Order
The first step is all about preparation. For traditional employees, W-2s mostly suffice, but if you’re self-employed, expect lenders to ask for more details. Here’s what you’ll need to have ready:
- Proof of income: Gather the last two years of tax returns, including 1099 forms or filed Schedule C forms showing your business income.
- Bank statements: Lenders often ask for 6-12 months of bank statements to assess cash flow and spending habits.
- Profit and loss (P&L) statements: If you’re a sole proprietor or running your own business, P&L statements will help paint a clear picture of your financial situation.
Having well-organized documents can speed up the approval process and demonstrate financial responsibility.
2. Build a Solid Credit Score
Credit scores play a decisive role in the mortgage approval process, even more so for self-employed borrowers. A higher score not only boosts your chances of approval but also leads to lower interest rates.
- Pay off outstanding credit card balances to improve your credit utilization ratio.
- Set up automatic bill payments to avoid late payments.
- Check your credit report for errors and have them disputed immediately.
Aim for a credit score of at least 700 to position yourself for favorable terms, though some lenders may accept scores as low as 620.
3. Save for a Larger Down Payment
Putting more money down can make you a less risky borrower in the eyes of lenders. While some programs allow for as little as 3% down, aim for a 10% to 20% down payment if possible.
A larger down payment:
- Reduces your loan-to-value (LTV) ratio.
- May eliminate the need for private mortgage insurance (PMI).
- Strengthens your overall loan application when combined with self-employment income.
Start building a rigorous savings plan to ensure you have enough set aside—not just for your down payment, but also for closing costs and any unforeseen expenses.
4. Keep Business Finances Separate
If you blend freelance income with personal expenses, now’s the time to separate them. Use dedicated business accounts for easier financial tracking.
Why is this important? Lenders like clarity. A clear distinction between your business and personal finances can help them gauge your borrowing capacity faster. Consider hiring an accountant to keep clean records and advise on strategies to maximize your loan eligibility.
5. Consider a Non-Traditional Lender
Traditional banks may have rigid mortgage requirements that exclude self-employed borrowers. Non-traditional lenders such as credit unions, online financial institutions, or even government-backed FHA loans can have more lenient qualifying standards.
Keep an eye out for mortgage products tailored to freelancers or creative financing routes, such as bank statement loans (which focus on cash flow rather than pay stubs).
Post-Pandemic Trends You Should Know
The pandemic influenced the housing market in ways that gig workers should be aware of. Here’s what stands out:
- Remote Work Drives Demand: Remote work opportunities have pushed homebuyers to rethink their locations, fueling demand in suburban areas and smaller cities.
- Low Interest Rates May Rise: While 2021 and early 2022 saw record-low interest rates, many experts caution that rates may increase in response to economic shifts. Locking in a mortgage now could help you secure a better rate.
- Loan Programs Are Adapting: Some lenders are creating mortgage solutions specifically for non-traditional income earners, which could work in your favor.
Where to Go From Here
Financing a mortgage as a self-employed individual after the pandemic might feel challenging, but by taking proactive steps, you can solidify your position as a reliable borrower. Start by organizing financial records, strengthening your credit, and exploring all available lending options.
Allied Residential Mortgage: The Smart Path to Homeownership
Allied Residential Mortgage is much more than one of the top mortgage brokers. ARM is also a family, with business relationships going back over 25 years.
Our founders cultivated a culture of integrity and collaboration. In the process, they created something special: a family, and we want you to be part of it.
