In the age of COVID-19, it may be a little more complicated to apply for a mortgage if you are self-employed or a gig-worker.
But it is still possible! Here a few things to keep in mind:
If you’re self-employed, a freelancer, or a gig worker, you earn what lenders call “non–traditional income.” You fill out the same mortgage application as everyone else, and lenders consider the same information to make their decision:
- Credit history
When you work for someone else, lenders can easily go to your employer to verify your income. If you’re self-employed, it’s up to you to provide the documentation your lender will need.
What lenders look for
Lenders want to know that all applicants, including self-employed workers, can repay their loans. They evaluate that your income is reliable enough to consistently make your monthly mortgage payments, property taxes, and insurance.
Additionally, you’ll need to have been in business for at least 12 months and will need to provide verification for your two most recent years of employment. You may also be asked to explain seasonal variations or other income changes that some self-employed folks experience throughout the year.
“The biggest challenge here is that many small business owners don’t actually have a business,” says Katherine Peoples, executive director at HPP CARES, a nonprofit consumer credit, debt, and housing counseling agency in Los Angeles.
“They haven’t set up their corporate structure correctly to be viewed as a business, and they also tend to want to write everything off on their taxes,” Peoples adds. In other words, the more deductions you take, the lower your documented net income will be.
Some mortgage lenders are tightening credit standards during COVID-19, so you need a little more proof of income these days.
Along with the typical documentation (listed above), lenders will likely also ask for the following:
- Audited year-to-date profit and loss statement: Also called an income statement, the profit and loss is a financial statement showing how much money you made and how much you spent for a particular period, such as a month, quarter, or year. You can have a certified public accountant, or CPA, audit your profit and loss statement, which means they have tested and validated the accounting system and financial information used to create the statement. If you need more information, the Small Business Administration offers several tips on its website.
- Unaudited year-to-date profit and loss statement: Rather than being officially audited, this is signed by the borrower. It reports business revenue, expenses and net income up to and including the month before you apply for a loan.
- Two business account statements: Ideally, you’ll have a separate bank account for your business showing your deposits and expenditures. The two business account statements in your mortgage application should be from the most recent two months listed on your year-to-date profit and loss statement. For example, for a year-to-date profit and loss statement dated through May 31, 2020, the bank account statements should be no older than from April 2020 and May 2020.
If you’re a little nervous about your ability to take out a mortgage, pause for a moment, and take a deep breath.
Self-employed and gig workers buy houses all the time. Knowing the types of income proof to prepare before you apply for a mortgage will make the process a little smoother and get you closer to your dream home.