Before a bank will loan out money, it wants proof that the applicant has a steady flow of income in the form of a good job. In some cases, a trust fund is accepted as income, but thatâ€™s rare.
While itâ€™s possible for someone pursuing a freelance career to obtain a mortgage, the process will involve solid proof that your unconventional income stream is sufficient to make the monthly loan payment. Hereâ€™s how to do it.
You should expect to be asked extensive questions about your financial condition, and to provide complete documentation, including your last two years of income tax returns and schedules, a year-to-date profit/loss statement, and a balance sheet that corresponds to the same time frame … preferably prepared by a professional.
The primary concern for lenders before handing out money is whether the prospective borrower has enough cash flow to meet the monthly payments. In a traditional â€œbrick-and-mortarâ€ job, itâ€™s a simple matter to look at tax forms and pay stubs to determine whether your income is enough to justify a loan.
A self-employed freelancer, however, is caught in something of a quandary. The IRS offers an excellent array of tax deductions for small business owners such as the freelancer. The agency allows self-employed loan borrowers to reduce their stated income in relation to the amount of deductions they can claim.
The purpose, to decrease the income amount shown on a tax form, may encourage the person to become â€œcreativeâ€ in walking the fine line between whatâ€™s legal and what isnâ€™t. Despite the moral implications, it all boils down to one thing: The bank is going to base its decision to lend money primarily on your income — period.
So the more the better.
The bankâ€™s formula
Generally, banks use a particular method to determine the predictability of a self-employed freelancerâ€™s cash flow. Take the last two yearsâ€™ net income (amount before taxes but after expenses) and add it to the total income for the current year.
Next, divide that amount by how many months are involved in order to determine a monthly figure for income.
Sometimes, self-employed freelancers who seek to borrow money may have to â€œthink outside the boxâ€ in order to obtain a home loan.
One strategy is to try seller financing, which means exactly what it says. The individual thatâ€™s selling the home or property carries the loan and the freelancer makes payments personally to the seller.
The seller has the option to ask the borrower for as much or as little proof of income thatâ€™s satisfactory, though thereâ€™s a good chance he or she will check the borrowerâ€™s credit. Another option is to use life insurance policies, stock, or personal assets such as CDs as collateral to secure a loan.
Also, if the self-employed freelancer has an amenable relationship with a mortgage lender, he or she could seek to obtain a business loan to purchase the home. Where thereâ€™s a will, thereâ€™s often a way.
You will encounter various obstacles if youâ€™re a self-employed freelancers and seek to obtain a home loan. But itâ€™s definitely possible if you can demonstrate good cash flow and credit score.