Pages Navigation Menu

Everything Personal Finance

How a Freelancer Can Get a $200,000 Mortgage

Owning your own home remains at the very heart of the American dream but with fulltime employment becoming harder to find you might think that it would be impossible for a freelancer to every own a home.  However, you would be wrong.  Freelancers can buy a home of their own – even get a mortgage – and this article will help to guide you through the process.

If you are reading this article then you either are a freelancer, know a freelancer or are considering freelancing.  Since that is the case, then I have to tell you the while freelancing can be fulfilling, it is also hard, and it takes drive and commitment to make it over the long haul.  Now, this isn’t to say that you shouldn’t be a freelancer, but if you are considering buying a home then you will need to have a plan to make sure the money keeps rolling in.

This brings me to a key point when a freelancer is looking for a mortgage, how to prove income.  In the last decade, it was easy – the ‘No Doc Loan’.  These were loans that did not require income verification, even for the self-employed.  As such, these loans become extremely popular as many borrowers overstated their income to make sure they could get the extra money they need to buy the home of their dreams.

Fast forward to 2017 and I am sure you know how that movie ended.  Many of these loans had balloon payments and when the economy took a turn for the worse many people were unable to continue making their mortgage payments.

As such, the No Doc Loan has gone the way of the dodo.  But that does not mean that freelancers should give up their dreams of ever buying a home.  Instead, you will need to find a lender who specializes in loans for the self-employed.

Another thing to know is that you will need to show at least 24-months of consistent earnings.  This can be difficult if you are just starting out as a freelancer, but it also means there is light at the end of the tunnel.

However, you will need to keep in mind that when you start out your income might be more sporadic than when you are established.  As such, the best advice is to give it six months or so to build up your client base and then start collecting the information you need to present to the banks.

This means that you will need to keep accurate books and make sure that your tax returns are in order.  If not, then you might have the income but won’t be able to prove it to the bank’s liking.

You might be asking yourself, what is the reason for the two years of verifiable income and tax returns?  Well, this is to help the banks better estimate your earning potential and the consistency of the work you do.

From there, the bank will be better able to model your income and expenses and this will help them to qualify you for a loan.

Let’s look at a real-world example.  If you are a freelancer and have just started out, maybe you are able to make $5,000 some months, but probably average half that most months.  As such, the bank will look at your average income and might even discount the peak months – especially if they are few and far between.

On the other hand, a freelancer with two, or more, years of verifiable income might be at a point where their average income is $4,000 per month or more.  In that case, the bank will take that data and combine it with the maximum debt-to-income ratio for a home mortgage, which is 43 percent.

This means that out of the $4,000 per month that you earn, you should have $1,720 to pay for all your loans, credit cards, and other debts.  Assuming for a moment that you have about $520 a month in debt payments, that will leave $1,200 to cover a mortgage payment.  At the end, this means that a freelancer averaging $4,000 per month over the required two-year period could qualify for a $200,000 mortgage – assuming they are credit worthy.

Now, there is one wrinkle and that is if you are a freelancer over the age of 62 as you have the option of getting a reverse mortgage.  Assume you are nearing ‘retirement’ and you are looking for lenders in a warm state such as Arizona, then you have two options.  First is a traditional mortgage using the process outlined above or you can go for a reverse mortgage.  In that case, you can either use your income or your retirement portfolio to prove you have the funds needed for a reverse mortgage.

There you have it, freelancers of all ages can get a mortgage.  Just remember to take your time, keep your eyes on the prize, and keep good records.  This way you can get a $200,000 mortgage even will working as a freelancer.