The economy is changing. The way we work is changing. Coronavirus, however, will transform the economy like nothing that came before it. Approximately 35% of Americans were freelancing in 2019, which is up 17 points. This number is only expected to rise as a result of the covid-19 pandemic.
Freelancing offers a lot of benefits but getting a mortgage to purchase a home isn’t one of them. Lenders are rightfully hesitant about lending to freelancers and the self-employed because they don’t have that stability of a consistent paycheck.
So, where does that leave freelancers? The truth is the rules of the game have changed. The coronavirus pandemic has seen additional requirements put in place for the self-employed.
Before you try to purchase a home, you need to be mindful of how 2020 has altered the situation for freelancers.
Mortgage market booming, but harder for freelancers
You might be surprised to hear that the mortgage market in the U.S. has exploded in 2020, with lenders expected to originate $4.1 trillion in loans, eclipsing the previous 2003 record.
This is down to low Federal interest rates and bond purchases. Although the market is expected to shrink in 2021, this indicates that now has never been a better time to purchase a new home.
Freelancers, however, may find it difficult to take advantage of these favorable conditions. Lenders are increasingly required to ask for more and more information from freelancers in light of the pandemic.
Guidance from Fannie Mae says that lenders now need to confirm that a borrower’s business will continue to operate 20 days from the date of the loan. Lenders are also now asking for more recent audited profit-and-loss statements than they did before.
It’s understandable that lenders are more cautious after so many businesses went bankrupt literally overnight, with more pain expected to follow, but it’s closed out a lot of freelancers from getting the financing they need to own a home.
What are your options?
I bought a home in Romania just a few years ago. The fact is that as long as your nationality is eligible to own property in your country of choice, the process is largely the same. The mortgage industry isn’t particularly different wherever you go because it’s just numbers on a screen.
Buying cash is, obviously, the best option if you’re a freelancer. If you already have a considerable deposit, it may be worth opting for a cheaper property you can cover in full.
If this isn’t possible, a mortgage may be your only option. When applying for a mortgage, you always have to think about how a lender may view you. You’re a risk simply because you’re not an ordinary W-2 employee.
Anything you can do to make a lender more confident in you will enhance your chances of getting that mortgage application approved.
It goes without saying, however, that if your credit score isn’t great, you’re drastically curtailing your options as this is the primary indicator lenders use when determining who qualifies for a loan.
Go small with your mortgage application
The more financing you want the harder it is to get. Figure out how much home you can realistically afford before going through the hassle of filing an application for a mortgage.
One of the cool calculators I find useful is the Home Loan Limit calculator from Mortgage Calculators. It gives you a rough idea of how much financing you can realistically apply for based on your income.
If you can afford to come up with a larger deposit and borrow less, you’re more likely to get the loan.
Your business’s trading period
When it comes to self-employment, the trading period is everything. New freelancers shouldn’t waste their time attempting to apply for a mortgage. If you’re thinking about going freelance but haven’t yet, you can usually get away with applying for a mortgage based on your 9-5 job. Once you’ve got the loan you can do what you want.
If you’ve just taken the plunge, however, you should look to have at least three years of financial statements before applying. Small businesses are especially vulnerable now. Back in April, approximately 52% of small businesses were predicting failure, according to the Society of Human Resource Management.
Not the sort of numbers that gives lenders confidence to lend to the self-employed.
The more years you have business accounts and tax returns for the less of a risk you’ll be perceived to be. I also recommend updating your future profit projections after taking the fallout from coronavirus into account.
How big is your deposit?
Bigger loans come with bigger risks. Lenders want to see that you’re sharing your part of the load. This is where it can get confusing for borrowers because every lender is different.
I find that when dealing with some lenders they’ll demand a much bigger deposit for the self-employed. Others, particularly smaller lenders, are more open to freelancers and may not increase the deposit asked for because they expect you to succeed based on your profit projections going forward.
There’s nothing you can do about this other than to shop around. Some mortgage brokers are known for offering great deals to self-employed applicants, including Luxury Mortgage, Zillow, and Freedom Mortgage.
Keep your files in good order
You might be asking why a mortgage lender would care about how organized your files are as long as they have the numbers they want.
The truth is good organization is a sign that the applicant is also organized and diligent. Don’t try to apply for a mortgage unless everything is up to date. Try to provide the lender with as many different numbers and as many different accounts as possible. You want to make a good impression.
Yes, your self-employed status matters
It’s becoming more and more common for mortgage brokers to take an interest in your precise status as someone who’s a freelancer.
Firstly, a freelancer may designate themselves formally as a ‘freelancer’. This is an official status and it’s the same self-employed status many electricians and plumbers also use. Lenders will calculate your income by taking your daily rate and multiplying it by the number of working days in a year.
If you’re under this status, you’ll still need to provide your contract history.
Sole traders will normally just need three years of records. It’s also worth adding in some profit projects for an extra layer of credibility.
For freelancers who started a limited company for their business, the calculation works a little differently. Directors of limited companies will need to provide their director’s salary and dividends. Alternatively, a lender may base their earnings on the company’s retained profits.
There’s no real ‘best’ option with regards to your self-employed status. The easiest is definitely operating as a sole trader, but ultimately you need to do what’s best for your business.
How difficult is it to secure a mortgage if you’re self-employed?
The truth is many of the difficulties of securing a mortgage if you’re self-employed are highly exaggerated. Don’t be scared off from trying to purchase a home simply because you’re not an ordinary W-2 worker.
As long as you have a few years of financial records and you’re applying for a mortgage that’s within your means, you shouldn’t have too many problems getting your application approved.
You might have to shop around, but if your business is a profitable one and your expectations are reasonable there’s no reason why you can’t achieve your dreams of homeownership.