To apply for a mortgage, there are numerous requirements you must meet. If you have a traditional office job, you'll be tasked with submitting recent pay stubs, W2 forms, and income tax returns. While income verification is straightforward for people who work for employers, it's more challenging for self-employed individuals who are classified as gig workers. While the mortgage approval process is more complex for a gig worker, it's not impossible. This guide takes a closer look at the strategies you can use to obtain a mortgage as a gig worker.
A gig worker is someone who earns income from work that occurs outside of traditional employer-employee relationships. If you operate as a driver for Uber, this is an example of gig work. Banks and other lenders want borrowers to provide them with documentation that shows a steady and consistent income.
Gaining approval is easiest when there aren't any gaps in employment over the past few years. As a gig worker, you may only be able to provide tax returns and bank statements, which might not be enough. The types of careers that are classified as gig work include the following:
If you're a gig worker, you can qualify for a mortgage. However, the requirements to do so are stricter than they are for an employee. Self-employed individuals with substantial liquid assets, a stable work history, and a strong credit report shouldn't find it too difficult to obtain mortgage loan approval.
If your annual income is inconsistent, lenders might be wary of giving you a home loan. Gig workers usually have access to numerous write-offs and tax breaks. While these advantages are useful during the tax season, they can be harmful when it comes time to apply for a mortgage. If you claim several deductions, your net income could be low or negative for the year. In this scenario, you'll need to make up for these deficiencies in other areas.
Keep in mind that each lender has its own qualification requirements. Before applying for a mortgage, you should know the specific requirements your preferred lender has.
To make sure your mortgage loan application is approved, adhere to the following steps.
If you're classified as a gig worker, your monthly income likely varies. In this case, you'll need to have the right documentation on hand to be approved for a loan. Your approval odds will be higher if you can show that your income has been steady for at least two years.
The types of income verification documents you need to produce include 1099 forms, bank statements, and tax returns. Your bank statements and tax returns should go back two to three years. You must also submit any 1099 forms you've received in recent years. If you're a gig worker, you'll get these forms from any client that has paid you $600 or more in a year.
Let's say you earn around $75,000 per year from a handful of clients. By producing bank statements and 1099 forms from your clients, you can show your lender that you earn enough to buy a home.
The strength of your credit score is just as important as the consistency of your income. A high credit score increases your chances of gaining approval for a mortgage loan. If you have a good score, your lender should be reasonably confident that you can make your monthly mortgage payments. Credit score requirements can be more stringent for self-employed people.
FICO standards indicate that any score between 740-799 is very good. If you have a score of 800 or higher, this is considered exceptional by the same standards. While some lenders might approve mortgages for borrowers who have a score of 680 or above, this is more likely when the score is 740 or higher. If you have a low or average credit score, you may want to avoid applying for a loan until you improve your financial situation and pay off some debt.
There are numerous steps you can take to increase your credit score, which include reducing debt, paying monthly bills on time, and searching your credit report for mistakes.
Lenders calculate risk based on many variables. One of these variables involves being able to afford the property. It's possible to identify how much you can afford when buying a home by using our online mortgage calculator. Along with mortgage payments, your monthly costs will also include utilities, food, other debt, healthcare, and subscriptions. You may need to pay HOA dues as well.
Once you add up your estimated monthly expenses, you can identify how much you're able to afford. Make sure you account for the ups and downs of freelance income. There's always a risk that you could lose a client or have a bad month. If you earn anywhere from $3,500-$6,500 per month, you should only search for homes you can afford at $3,500-$4,000.
Your debt-to-income ratio is the total percentage of your monthly income that's used to make debt payments. If the percentage is low, your odds of being approved by a traditional bank are higher. Try to maintain a debt-to-income ratio of 36% or lower. If it's higher than 36%, pay off some of your existing debt to reduce it before you apply.
Lenders take on more risk when they provide large mortgage loans. While lenders determine risk based on many factors, you're more likely to receive approval if you can make a down payment of at least 20%.
Save by Avoiding PMI
If you're applying for a conventional mortgage, a down payment of 20% or higher allows you to avoid private mortgage insurance and show the lender that you have considerable cash reserves.
This step isn't entirely necessary but may increase your chances of being approved for a mortgage loan. You don't need to submit a comprehensive business plan. However, you may benefit from providing documentation that highlights the current demand for your services as well as the health of your industry. If you have a professional website that shows how successful you are, your lender may become more confident about giving you a loan. Some of the documents you should consider giving to your lender include:
Being a gig worker gives you more control over your schedule, which is a kind of flexibility that isn't possible with a standard nine-to-five job. One of the few drawbacks is that being approved for loans can be more challenging. You can bypass these obstacles and increase your chances of getting a mortgage by maintaining a high credit score, making a large down payment, and gathering the right financial documents. If you adhere to this guide when applying for a mortgage, you should be well on your way to getting a home.
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