More people are working remotely since the COVID-19 global pandemic. However, many of these work-from-home jobs also mean that not everyone is considered a full-time employee. Several of these jobs are actually listed as freelance or independent contractor positions. This can get incredibly confusing especially if you are looking to buy a house.
Not to worry. You are still more than capable of getting a loan. So if you’ve received a luxury real estate postcard in the mail and find yourself ready to relax in your new waterfront home, take a second to educate yourself before running to the bank.
Here are a few things to know before you start applying for loans.
Question: Am I Eligible to Purchase a Home as a Freelancer?
This question varies depending on each person. As with any mortgage or home loan, you’ll need to provide at least two years of tax returns. Usually, as an employee, this means providing your W-2. As a contractor, you’ll have 1099s instead. You’ll want to provide more than two years of well-documented tax forms that state your adjusted gross income (AGI). This allows lenders to get a clear picture of your overall finances each year.
Since taxes aren’t being taken out of your paychecks like a typical employee, you’ll want to work closely with an accountant. Having clearly defined and documented income is the key first step to be eligible for any loan.
Question: What About Tax Deductions?
The most important thing a lender wants to see is that you have a stable and consistent income. This applies to how much money you are making each month and how much you are writing off for your end-of-year taxes.
As an independent contractor, you’re allowed to deduct various items from your overall income. Because of this, your net impact is impacted. Say you are making around $85,000 per year as a contractor. In theory, this sounds like you’d make more than enough money. However, if you’re writing off over $35,000, then a lender might not be able to approve you for as large of a home loan as you might be trying to take out.
Question: What If I Worked For Multiple Companies?
Freelancing can be a very lucrative job. If you’re a freelance marketing consultant, for instance, you might run into a more difficult time applying for a loan than someone who has worked at the same company for ten years. You might have various 1099s from several different companies.
This is why documentation is crucial. Banks want to see that there is the same type of stability with your income as someone who has a W-2. If you’re jumping around working with various companies with a range of compensations, it’s going to be more difficult for a bank to trust that you’ll have the ability to pay the loan back.
In this situation, it might be worth setting up a small business for yourself instead of managing various tax forms.
There is a lot to consider when you are looking for a new home, especially when your income and job are a bit more flexible or sporadic as an independent contractor.
However, it’s not a deal-breaker for lenders. What we can tell you is that with the following details, you will have a much easier time as a freelancer when applying for a home loan:
- Two or more years of well-documented, verifiable income with tax returns and 1099s
- An excellent credit score
- Backing from your accountant
Also, always talk to an accountant before trying to apply for a loan.