The gig market has boomed in recent years, with people increasingly choosing to freelance either by starting their own gig businesses or working on unsalaried tasks from more prominent companies. Reports from the Freelancers Union revealed that more than 50 million Americans worked as freelancers in 2020, representing around 35% of the US workforce. While working as a freelancer apparently has its perks, qualifying you to get a mortgage is certainly not inclusive.
Before the pandemic.
Before the arrival of the pandemic, self-employed borrowers (freelancers, independent contractors, business owners, and sole proprietors) were only required to have two crucial things to get approved for a mortgage: two years of tax returns and proof that their business is operating, according to Todd Huettner of Huettner Capital.
“Depending on timing, if you were more than six months into the following year, you may have also needed an unaudited profit-and-loss statement for the business,” Huettner says.
On top of those exclusive requirements for self-employed, the other basic requirements for borrowers, such as minimum credit score and maximum debt-to-income ratio, also applied to them.
“Most people don’t realize this and think there are totally different rules,” says Huettner. “But the main difference is that as a freelancer, you just had to document the income.”
During the pandemic period.
Since the arrival of COVID-19 on American soil in early 2020, there have been several reports of freelancers facing more challenging times in getting mortgage approval. The main thing that changed for freelancers during the pandemic period is the increased need for documentation. Amid the pandemic-induced economy, lenders tightened their rules and became extra cautious when determining who should qualify for the mortgages and whether they’re realistically capable of paying back.
“In the past, we could simply use the prior year’s tax returns,” says Todd Wells of Sinberg Capital Lending. “There’s more documentation required post-COVID for self-employed borrowers. Now, we need a year-to-date profit and loss statement, as well as business bank statements to support the profit and loss statement.”
How do you increase your chances of getting approved as a freelancer?
Besides doing all the typical things to boost your chances of getting approved, such as raising your credit score and improving your debt-to-income ratio, a freelancer should also be ready to jump through some extra administrative hoops to prove that your income is what you say it is. This includes having your profit and loss (P&L) statements ready and even pulling some bank statements to back them up. Other times a lender might allow you to get through with just an audited P&L statement.
However, getting an audited P&L statement is never easy. “Most people don’t have a clue about the time and cost of obtaining an audited financial statement,” says Huettner. “Most CPAs don’t provide this service—it’s a very specific process with a lot of requirements. The result is that it can cost thousands of dollars and take several weeks or months to finish.”
Most freelancers choose to present an unaudited P&L statement backed with bank statements to prove their income when given the option.
So, if your freelancing business has been doing well amid the pandemic and you have documentation to prove it, your chances of qualifying to get approved for a mortgage are very high. But if your business slowed down due to the pandemic or you lack the documentation to prove your income, getting a mortgage might be a lot harder than you thought.