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How to get a mortgage when you’re self-employed

Yes, it’s possible, but you’ll have to do more paperwork than the average homebuyer

The Bureau of Labor Statistics estimates that more than 10 million Americans will be self-employed by 2026, and the sixth-annual Freelancing in America report from Upwork and the Freelancers Union places those estimates even higher, suggesting that as many as 53 percent of Gen Z workers freelanced in 2019 when one factors in the emergence of gig-economy jobs.

Whatever the number, many Americans rely on some measure of freelance and/or contract work to make ends meet part- or full-time. Those who do it successfully may come to a point when they are ready to become homeowners, even with a less traditional job situation. Applying for a mortgage as a self-employed individual can be tricky, but there are a few key ways to look your best in front of banks. Here are some places to start.

Be prepared to explain your work history—a lot

When Davita Scarlett, 32, began the process of applying for a loan, her mortgage broker warned her that she would need to explain both her employment record and her industry throughout the process.

Scarlett had spent several years working as a TV writer in Los Angeles—a job that can look incredibly sporadic on paper. As she explains it, a season of television takes about six months to write depending on the number of episodes. When those six months are up, the writers room goes on break and then comes back the next season if it has been picked up.

“You go from gig to gig, but you might have gaps in your employment that look funky to someone from the outside who doesn’t understand how [it] works,” she says. “In the last five years, I’ve worked on about six different shows at six different companies. To a bank, which is looking for consistency, it constantly looks like I’m changing jobs—and they don’t know why.”

Scarlett’s broker suggested that she tackle the banks’ potential wariness by confirming her employment with any company she had worked with regularly for the last few years. Most writers are represented by agents and managers, she says, so she reached out to her agency—even though she isn’t technically employed by them. “I had been with my agent since [about] 2014, so the plan was for the bank to call my agency and verify that I had been a client of theirs for the last five years,” she explains.

The endorsement requests didn’t end there. Because she had decided to purchase an apartment in a co-op, Scarlett’s homebuying process was even more involved. Co-op applications can be just as paperwork intensive as mortgage applications, requiring the prospective buyer to deliver the same financial documents and assurances to a board that will vote to approve them—or not.

“I had to give a lot of information. When I went to the board meeting, the board members asked me as well about my employment history and the gaps between my jobs as well,” she says. “It was kind of a vulnerable process because you just have to offer up all of your financial history and hope they are okay with that.”

Part of the application also includes submitting letters of recommendation, ideally from people with whom you’ve lived and/or worked with in the past, so Scarlett decided to ask a recent boss to write a letter. They were “lovely” and gave their full support, but the process was still a little discomfiting. “I’m a private person, so I didn’t necessarily want to tell everyone in the world that I’m purchasing this apartment,” she admits.

Ease up on your tax deductions

The 2017 Tax Cuts and Jobs Act eliminated some deductions that self-employed workers claimed in previous years, but write-offs remain a common way for many freelancers and contract workers to decrease their tax burden. Unfortunately, aggressive deductions may also make some lenders wary of self-employed workers.

“I understand why a lot of people do that, but it’s not good when it comes to qualifying,” says Kathy Cummings, the senior vice president of homeownership solutions and affordable housing programs at Bank of America. “It gets a little bit sticky. Banks, by law, have to make sure that you have the ability to repay, so we’re not going to have a lot of leniency in how we evaluate your income and income potential.”

If your adjusted gross income appears worryingly low after deductions are factored in, it may seem at first glance that making a monthly mortgage payment will be out of reach. Drastically reducing your tax liability may make doing the cost of business as a self-employed individual easier each year, but it can also impact your debt-to-income ratio—an important aspect of your financial profile that lenders consider when assessing mortgage applicants.

Lenders will request two years of tax records from all workers—and those two years need to be “a good fit for supporting the mortgage payment you will be responsible for going forward,” Cummings explains. So, “if you’re self-employed and doing heavy write-offs has been your strategy, you want to make sure that you stabilize for two years.”

If forgoing write-offs isn’t an option for you, she says finding ways to prove you have the income to backup your request can help. “It should be reflected on your tax return, but another thing that lenders can look at are the contracts you have for future employment,” she explains. Having upcoming projects confirmed in writing—stating what you’ll be paid—may serve as much-needed back-up.

Know how your tax status may impact you

Another tax area to consider is how you file, and when. Just as banks want to see consistency of income and employment, they may also shrink away from changes in your filing status—even if they’re positive.

Scarlett incorporated in 2018 and knew that 2019 would be the first year she would file as a corporation rather than as a solo freelancer. However, her mortgage broker suggested that she get an extension to file her taxes later in 2019, after the apartment closing. “It’s not that it was bad to have incorporated—it’s actually great because it means that you’ve probably reached a new level of income—but it looks scary to the banks because it’s different and they like consistency,” she says.

So, if you’re about to make the switch to an LLC while simultaneously looking for your first home, it may make sense to hold off on the LLC filing, which is what Scarlett did. This will keep your financial picture cleaner and more consistent for the bank.

Be prepared to prove your profitability

For the self-employed or small-business owner, your most recent tax returns will likely need to be supplemented with an up-to-the-moment profit-and-loss (P&L) statement for your business, Cummings says.

There’s a good chance you’ve never made one of these before, but they are straightforward to prepare. You’ll need a record of all your business’s income and expenses in the current calendar year (your lender can likely provide you with a sample form for this). You’ll subtract your total costs from your total revenue to get your net income. Then, you’ll subtract the taxes your business pays to get your net income after taxes.

If less than a quarter has passed since you filed your tax return, you may be in luck and get to skip this step. But since the mortgage and homebuying process is well known to stretch longer than expected, we’d advise you to start working on one just in case the bank requests it later in the process.

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