Freelancers. Contractors. Self-employed. Gig workers. Side hustlers.
Whatever you call yourself, if your income is non-traditional, what the media is calling “variable,” getting a mortgage can seem out of reach — until you actually try.
If you’re in the gig economy, it can feel like everyone else is snagging their own place when you haven’t even been invited to the party. That’s because mortgage companies traditionally want to see a steady income — the longer, the better — without gaps in employment. But that’s today’s reality. Self-starters (or those uninterested in climbing the corporate ladder) have found they can make more — and have more freedom — by working outside the box.
The list of alternative employment opportunities covers a variety of roles, including:
- Software developers
- Drivers for Uber, Lyft and DoorDash deliveries
- Wedding photographers
- Etsy store owners
- Instagram influencers
- Dog walkers and cat sitters
- Instacart shoppers
- House cleaners
- Personal chefs
- and much more
So, can gig workers buy a home?
Absolutely. While it’s harder to get approved for a home loan when you have an irregular paycheck, it’s still doable. There are just some things you need to do a little differently. Read on.
Get pre-approved before house hunting
As a rule, unless you’re prepared to pay for a new house in cash, get approved for a mortgage before heading to open houses. Not only does pre-approval outline how much house you can afford, but it also helps you save time by skipping over the homes you can’t. Plus, real estate agents love buyers who know their budgets. It saves them a lot of energy and frustration and makes for a better home shopping experience.
Think “Net” income
Every lender needs to verify a borrower’s income. That can be tough when the borrower works as, say, a musician, who might book gigs solidly for a few months and then have no work at all for an extended time. It’s risky to loan money to someone who may not have a steady income can make lenders extra wary.
So, if you’re self-employed and looking for a mortgage, don’t be surprised if you and your lender disagree on how much you actually make. Without hard numbers, lenders may calculate average monthly income taking the previous two years of your net income — not your gross income — and divide by 24 months. The number they come up with might differ from the number you had in mind when you do the same formula with gross income.
Gather your taxes
Since you don’t have W2 forms, you’ll need to provide 1099s if you have them. Plus, you’ll need two years’ worth of tax returns — exactly the same as employed borrowers with full-time jobs.
The difference is in how you’ve previously declared income. If you have been a full-time dog walker and have been paid in cash and never reported those earnings to the IRS, your tax returns won’t show all that hard-earned money. That small bump in getting paid under the table could keep you from getting a house. Rule of thumb? Be honest, keep records and pay your taxes.
Consider your deductions
If you’re not looking to buy a house immediately, consider dropping a few tax deductions that have helped you in the past. Remember, lenders look at your net, not gross, income, so all of those tax deductions keep your net income number down. Losing them might boost your taxable income, which may help you qualify for a larger loan.
Here are the documents you may be asked for, so it’s a good idea to start collecting them now before you’re in the middle of the home-buying process.
- Your Schedule C / 1040 tax form
- Your Schedule K-1 / 1065 tax form if you formed a business partnership, a corporation or an S Corp. If this pertains to you, you may also need to supply business tax returns for the past two years.
- Your business license, if required in your field
- Bank statements from the past few months
- Profit and loss statements (your lender will help you prepare this if you don’t already keep one)
- Landlord letters detailing on-time rent payments, including the amount
- Letters from clients verifying the length of the working relationship
Keep personal and business expenses separate
Many freelancers and contract workers swear by having a business bank account that is 100% separated from personal funds. This’ll help underwriters better understand deposits and expenses associated with business income.
Save, save, save
One of the advantages of being a gig worker is you work when you want. You might work only half the year or maybe you work a month and a month off. Hollywood actors are gig workers, too. There’s no fat paycheck when they’re in between TV shows. The difference? They bank earnings from each gig to tide them over until the next.
Lesson here? Gig workers need to be good at saving. To be pre-approved for a mortgage, you’ll want to show that you can cover at least a year of mortgage payments. As long as the numbers add up, you can still qualify.
Don’t spend beyond your means
With an average monthly income based on net income, as opposed to gross, you may be offered a lower amount than you might expect. To appear less risky, rethink your target price range and have more cash to put down. That’ll make you a stronger candidate and, in the long run, provide you with lower monthly mortgage payments that’ll be easier to handle, especially if you anticipate future gaps in your gigs.
Bonus: With a good credit rating and enough funds stashed away, you’ll probably be offered the same rates as a borrower with a traditional job. So make it easier on yourself and seriously consider a less expensive home.
Keeping monthly mortgage payments low is a smart move for gig workers who have variable incomes. To help, make a down payment of at least 20% so you can avoid costly private mortgage insurance. Also referred to as PMI, this insurance is a safety net for the lender should the loan default. It’s calculated annually, divided into 12 payments and included in your mortgage each month.
Don’t forget debt
Gig workers — just like any prospective home buyer — should aim to cut as much debt as possible. This generates a more attractive debt-to-income ratio (DTI): the difference between your overall debt and annual income — in your case, net income. Lenders use DTI to determine if you’ll be able to afford your monthly payments while still repaying other debts.
According to NerdWallet, some lenders like to see a DTI ratio of 36% or less, and most will cap total housing and other monthly debt payments at about 43% of income. Some might go higher, but as a general rule for gig workers, try to keep debt to a minimum if you’re in the market for a home.
Additionally, if you are in a business partnership or you have incorporated for tax purposes, work at paying down business loans to get you to an acceptable DTI.
Be meticulous about credit scores
If your income is variable, lenders will demand a good credit score. Before you apply for a home loan — long before — try to get it up to 700, which is considered ideal. You might still get a home loan with a lower score, but higher scores open up lower interest rates and better terms, which help keep your monthly payments manageable. Learn more about improving credit scores here.
Point out your year-over-year increases
Hopefully, your side hustle is working. You’ll improve your odds of getting approved by showing that business is good and that you’re earning more year over year. You can prove this with your two years of tax docs, but to really tell a positive story, go back a few more years than required.
You can do this!
As you can see, it is possible to get a mortgage with variable income. Sure, it can be more challenging and you need to be prepared to explain income dips and all that. But isn’t a home of your own worth it?
Have more questions? If you’re a prospective homebuyer with a variable income, reach out to one of our local loan officers to discuss your options. Or, if you’re ready to get started now, you can always apply online!