As independent work grows increasingly common in Champaign County, freelancing offers both advantages and drawbacks: While freelancers lack employer-provided benefits like health insurance, they gain flexibility in when and how much they work, unlimited earning potential, and better work-life balance to design their ideal lifestyle.
There is an issue that can arise if you’re a freelancer or contractor, though.
How do you get a mortgage to buy a home in Champaign County?
When applying for a mortgage as a freelancer or self-employed worker rather than a traditional employee, providing proof of income is more complex without a steady paycheck, and you’ll likely face increased scrutiny from lenders.
Keep Up with Relevant Documents
Keeping track of earnings and spending can become disorganized over time, which can create problems when applying for a mortgage.
If you are self-employed or a freelancer, your income will naturally fluctuate with ups and downs. To reassure lenders, you should provide documentation of your long-term average earnings over several years to demonstrate a reliable pattern. Showing steady or ideally upward earning trends over time will help allay concerns about inconsistent income and strengthen your home-buying prospects. If you cannot yet document a stable earning history, you may need to wait before purchasing a home.
If you are self-employed, you probably try to deduct as many business expenses as possible when filing your taxes. While understandable, remember that lenders also want to see strong income when applying for a mortgage. So, balance your tax deductions now with the need to show ample income later if you plan to buy a home.
When applying for a small business loan, be prepared to provide at least two years of tax returns, which will likely be 1099 forms rather than W-2s if you are self-employed. In addition to tax documentation, you may want to show bank statements and profit/loss statements to demonstrate your finances. Letters from clients confirming ongoing work relationships can also help establish stability for loan approval.
Income Calculation
If you are a freelancer, your income will be calculated differently. To determine your average monthly income, your lender will take your adjusted gross income from the past two years and divide that total by 24.
Save As Much As You Can
To avoid the cost of private mortgage insurance, aim to save at least 20% of a home’s purchase price for a down payment. The larger the down payment you can make, the more it demonstrates your reliability as a borrower.
Clean Up Your Finances
If you are self-employed and trying to buy a home, expect to face more financial scrutiny. Lenders will hold your finances to a higher standard, so take steps to strengthen your financial profile. Aim for a credit score of 740 or higher to improve your chances of approval.
To improve your credit score and chances of qualifying for a mortgage, start paying down your debt, including credit card balances. Lenders view credit utilization – the percentage of available credit you are using – as an important factor, so aim to keep it below 30% of your total credit limit.
Review your credit report before applying for a home loan. This will reveal areas needing improvement and any potential errors, which are more common than many realize.
Before applying for home loans, avoid opening any new accounts or lines of credit, as doing so could negatively impact your credit score.
Before starting the mortgage application process, separate your business and personal bank accounts. Personal bank accounts should not be used for anything related to your business.
Being a freelancer poses unique challenges when applying for a mortgage to buy a home in Champaign-Urbana, but success is possible with thorough preparation.
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