If you are a freelance employee or entrepreneur, you may wonder how your income stream will impact getting approved for a home loan, or mortgage. While the process can be slightly different, with additional paperwork needed, working for yourself doesn’t mean that you have to put your dreams of homeownership on hold.
Documentation for your income
If you are a freelancer, chances are you will receive a Form 1099-MISC from your employer to show how much you earned during the year. The IRS requires that you submit these documents when you file your taxes each year to account for all income earned (and taxes owed).
Fortunately, the same documents that satisfy the IRS can provide a lot of information to lenders as well.
What lenders want to see
When loaning money for a home purchase, lenders want to know that you can make your monthly payments on time. They look at a variety of factors to determine how likely you are to pay them back, including your credit score, debts, and any adverse issues like a bankruptcy or foreclosure. They also look at your income, which is where 1099 workers can run into trouble.
Freelancing is typically less consistent than an employee who works in a more traditional position (and receives a W-2 to document their income). This makes lenders nervous, as income can fluctuate from month to month and make it hard for the borrower to pay the mortgage. If you are a 1099 employee, expect to be asked for three years or more of tax documents. Lenders want to see that your income has been steady or increasing and comes from a variety of clients.
As a borrower, you can use your 1099 income to qualify for a mortgage. You may just need to provide a longer history. Keeping debt in check and paying your bills on time can also help by showing that you have an excellent credit history and will make a great borrower.