Self-Employed and Applying for a Mortgage? Here’s What’s Changed Since COVID-19
The gig economy has blown up in the past few years, with more and more people choosing to work as freelancers, either by starting their own businesses, or by picking up nonsalaried jobs from bigger companies.
According to the Freelancers Union, over 50 million Americans worked this year as freelancers, a number that represents roughly 35% of the country’s workforce.
While freelancing undoubtedly has its perks, helping you get a mortgage is not one of them.
Since COVID-19 started tearing through the country in March, we’ve heard reports of freelancers having an even harder time getting approved for mortgages. Here’s the latest on what to expect when applying for mortgage as a freelancer in the post-coronavirus era.
Getting a mortgage as a freelancer (pre-coronavirus)
Before diving into what’s changed for freelancers applying for mortgages in the COVID-19 era, let’s back up to what it was like before the pandemic.
According to Todd Huettner of Huettner Capital, the two most important things self-employed borrowers (which includes freelancers, independent contractors, business owners, and sole proprietors) historically needed for mortgage applications were: two years of tax returns, and proof their business was in operation.
“Depending on timing, if you were more than six months into the following year, you may have also needed an unaudited profit-and-loss statement for the business,” says Huettner.
That’s exactly what it sounds like: a financial statement that records all the losses and gains of a business over a period of time.
Besides tax returns and proof that your business was up and running, lenders also had basic requirements for any borrower (self-employed or otherwise), which included things like a minimum credit score and maximum debt-to-income ratio.
“Most people don’t realize this and think there are totally different rules,” says Huettner. “But the main difference is that as a freelancer, you just had to document the income.”
The main thing that’s changed for freelancers applying for a mortgage is that the need for documentation has increased—by a lot.
Because of the economic turmoil caused by the pandemic, lenders are being extra careful when it comes to determining who actually qualifies for these mortgages, and whether they can realistically repay them.
“In the past, we could simply use the prior year’s tax returns,” says Todd Wells of Sinberg Capital Lending.
“There’s more documentation required post-COVID for self-employed borrowers. Now, we need a year-to-date profit and loss statement, as well as business bank statements to support the profit and loss statement.”
In other words, lenders need a lot more proof that you’re in a good position to take on that mortgage, and providing that proof could be a major pain, to say the least.
How to increase your chances of getting approved
Beyond doing all the usual things to increase your chances of getting approved (like boosting your credit score and improving your debt-to-income ratio), freelancers should also be prepared to jump through a few extra administrative hoops to that prove their income really is what they say it is.
This will include things like getting those profit and loss (also called P&L) statements ready, and possibly even pulling some bank statements to back them up. And while some lenders might allow you to get by with just an audited P&L statement, that may not be any easier.
“Most people don’t have a clue about the time and cost of obtaining an audited financial statement,” says Huettner.
“Most CPAs don’t provide this service—it’s a very specific process with a lot of requirements. The result is that it can cost thousands of dollars and take several weeks or months to finish.”
In today’s hot seller’s market, taking weeks or months to get approved would be simply out of the question.
That’s why many freelancers (when given the option by their lender) are choosing to prepare unaudited P&L statements as well as bank statements to prove their income.
Since this can take several hours (and plenty of fishing around in your various accounts) to complete, it’s a good idea to have these things ready before you need them.
“Have complete and accurate documentation going back as far as you can, 24 months if possible,” advises one former banker, Karen Condor of ExpertInsuranceReviews.com.
“This will prove that you can consistently afford loan payments. The higher your FICO credit score and the more robust your income documentation, the higher the chance of loan approval.”
The final word
Is it harder for freelancers to get approved for mortgages in the COVID-19 era? Yes and no. If your business has been consistently doing well and you have the documentation to prove it, you might be just fine.
But if you’ve recently hit a slowdown, or are having issues producing the extra proof of income, then getting that mortgage for your dream home might be harder than you thought.
Article by Larissa Runkle on realtor.com