FINANCIAL WELLNESS

3 min read

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Jun 2018

Home Buying Advice Freelancers Need to Know

Living the freelance life certainly has its benefits: building your own schedule, calling the shots when it comes to your work, and perhaps being able to achieve a better balance in life. Nowadays, freelancers make up over 35% of the U.S. workforce and this number is projected to rise to 42% by 2020. With that said, it only makes sense that the number of freelancers who want to buy homes will be on the rise as well.

Preparing to buy a home as a freelancer

If you’re a part of this growing group of workers and would like to buy a house, there are a few things you should be aware of before you begin the home buying process. The mortgage application process can be a bit more complex for freelancers since you won’t receive a W-2 at the end of the year, and it’s your responsibility to report income correctly and pay taxes to the IRS on your earned income. Below, we’ll highlight 5 factors you should consider before you apply for a mortgage.

Prove your income

If you’re brand new to freelancing, pay close attention. In order for your earnings on your 1099 forms to be factored in on your mortgage application, you must be able to provide two years of tax returns that show your earnings as a freelancer.

In some cases, freelancing can mean irregular paychecks – some months you may bring in more income than other months – so your lender wants to get a clear picture to determine how much home you can comfortably afford.

Keep saving up

Regardless of your employment status or financial situation, the more money you have in savings, the better when it comes to buying a home. Your savings can be a huge factor in gaining mortgage approval as a freelancer. Since financial institutions err on the side of caution and feel that unstable sources of income are riskier, it may be more difficult to get approved for a mortgage. But the more you have in your savings account to apply toward a home’s down payment,, the more likely they’ll find your financial situation favorable for taking out a mortgage. Putting more down up front also means you can borrow less, which will save you money over the life of your loan.

Monitor your credit

One of the biggest things that can benefit you as a freelancer applying for a mortgage is a high credit score. Good credit is a significant factor when it comes to obtaining a mortgage and while it may not make or break your ability to buy a home, it can certainly help you get a better interest rate and have more loan options available from which to choose. Before you even begin the home buying process, it’s a good idea to check your credit score and review your credit history to see if there are any errors. It can take some time to repair credit, so the earlier you get started, the sooner you’ll be ready to purchase a home.

Good Credit Habits

  1. Make all of your payments on time, including any loan payments, rent, and bills. Payment history is a big part of your score.

  2. Watch your credit utilization, which is your usage compared to your limit. Keeping it as low as possible helps your score.

  3. Don't open too many lines of credit at once and keep accounts open as long as possible. Account age affects your score.

  4. Check your credit score annually. Look for any mistakes or discrepancies.

Tame your tax deductions

One of the obvious perks of freelancing is the ability to write-off certain expenses, like your Internet or cell phone bill, office space, supplies, and more. Be cautioned, though – the more you deduct, the less income you’ll have on your tax return, which means your lender will be factoring your home buying ability on a lower income. It might be worthwhile to cut back a bit on how much you’re deducting from your taxes if you know you intend to purchase a home in the next few years.

Review your mortgage options

There are a variety of loan options out there to fit just about any buyer’s financial needs. While putting down a full 20% on a conventional loan is a great way to save money over time, it’s possible you don’t feel financially ready to do so – and that’s completely fine. Fortunately, there are some great lower down payment options that may be a good fit, such as the:

  • FHA loan – This loan program requires only 3.5% down on a home purchase.

  • USDA loan – This loan program offers zero down payment on homes in a qualifying rural area.

  • VA loan – This loan program for active duty military, veterans and their families offers a zero down payment.

In some cases, you can also take out a conventional loan with as little as 3% down. You should be prepared to tack on private mortgage insurance to a conventional loan when putting down less than a full 20%. Having a freelance career shouldn’t hold you back from reaching your homeownership goals. With careful planning and smart financial choices, you can be well on your way to purchasing a new home. Your lender is a great resource for explaining how freelancing impacts the mortgage application process, so don’t hesitate to reach out with any questions you may have.