How to Get a Mortgage if You're a Freelancer, Contractor, or Self-Employed

Once upon a fairytale, it was understood that if you graduated high school, got a job, and stuck to it, you would end up retiring with a modicum of grace and security at a predetermined age. With a little luck, you might even have a few golden years to enjoy in the company of your family and friends—and making your way towards that coveted dream didn't even involve any kind of side hustle.

These days, things are a little different. Millennials and Gen Zers are still living the results of an economy laid low by the Great Recession, and that economic landscape means that they are far less likely to enjoy a forward-moving amble through corporate life the way their Boomer (and, in some cases, Gen X) predecessors did.

In fact, a recent survey carried out by CareerBuilder found that Baby Boomers stayed at each job for an average of eight years and three months, while Gen Zers only stay, on average, for a little over two years. Add to that the ongoing market mess caused by the COVID-19 pandemic, and it's no wonder why the Gig Economy Data Hub estimates that a quarter of the entire American workforce participates in the gig economy in some capacity.

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Not only has the economic reality made it difficult to be able to get and keep a long-term corporate job, it seems that members of these generations also don't want to. Millennials and Gen Zers, for example, are more likely to choose to be independently employed, whether as a business owner or a gig worker, according to a survey carried out by MBO Partners. The same survey showed that, in 2020, 68% of new independent workers were members of those two generations.

Challenges for Prospective Home Buyers

To make matters worse, the real estate market is having a bit of a chaotic moment as well. Housing prices have gone up, especially since the pandemic made working from home more common and desirable. According to data aggregated by DQYDJ, the median price for a single-family home in January of 2019 was $275,236 and change. Now, as we near the end of 2021, federal census data shows the same number as $408,800—an increase of $133,564. On its face, this data suggests that a workforce that's gigging more than ever is also paying more than ever for housing. How are they doing it?

It turns out, a lot of them aren't—and the hefty prices aren't helping. According to Apartment List's 2021 Millennial Homeownership Report, this generation isn't exactly optimistic about owning property; the report shows that 18.2% of millennials expect they'll never be able to buy a home. In 2019 and 2018 that number was 12.3% and 10.7%, respectively.

"Low housing inventory, unusually high demand, and record low interest rates have driven home prices skyrocketing across the country since the start of the pandemic," says Andy Taylor, vice president and general manager for Home at Credit Karma. "In a world of expensive homes, buyers need to take out larger loans for the same housing stock, and many first-timers are being priced out."

It doesn't have to be that way, though. Regardless of age, whether you're a contractor or a salaried employee, and irrespective of your income status, there's a path to homeownership for you. Actually, the gig economy might even be offering a better way to get to a down payment.

"The gig economy has been a powerful force for people's personal finances," says Robert Farrington, founder and CEO of The College Investor. "I think most people leverage it in one of two ways: [Either] to survive [or] to thrive. First, there are people who have resorted to gig work simply to close a gap in their finances. [Among those] who have leveraged gig work to thrive, I believe that gig work has enabled [them] to achieve financial goals faster—whether that is saving for a home or retirement, paying off consumer debt, and more."

Farrington emphasized that "anyone can apply for a mortgage," and encouraged first-time homebuyers not to dismiss the prospect at the outset. That being said, self-employed applicants should also prepare for some extra acrobatics during the application process.

Types of Mortgages for Self-Employed Home Buyers

Mortgages come in an array of flavors and sizes, and choosing the right one for you will mostly depend on your specific needs. How much of a down payment have you saved up? Are you a military veteran? Are you buying in an urban or a rural area? What does your credit score look like? All of these will determine which option is the least expensive and safest for you.

Without getting into the weeds too much, let's dig into the four main ways to borrow money and buy a home.

1. Conventional loans are great for anyone with a solid credit score and two years of tax returns.

These are the bread-and-butter of the mortgage market: Money that financial institutions lend you based on your credit rating, income, and how much of a down payment you can put down. A borrower usually has either 15 or 30 years in which to pay back both the principal (the original sum) and any interest accrued during that time.

Each case will be unique, but largely speaking, borrowers who are considered "higher risk" to the lender (such as those with a lower credit rating or those without much dependable income) will be offered higher interest rates. A borrower can also determine whether they prefer a fixed-rate loan, meaning that the interest rate is a bit higher but stays put no matter how the market fluctuates, or an adjustable-rate loan, meaning that the interest rate may at times be lower than a fixed loan would be but will fluctuate at set times in tandem with market movements.

"Before lending you money, lenders typically review your credit, income, and other factors to assess how likely you are to pay the loan back on time," said Taylor, "but when you're self-employed, proving you have a steady income stream and can make on-time payments may be a challenge. Make sure to keep every document possible, and have those ready when you're going to apply for a mortgage." Freelancers and contractors won't have W-2s or pay stubs to prove a steady income, which is why lenders will request at least two years' worth of tax returns that show your annual salary.

As freelancers, it's tempting to add as many (legitimate) deductibles as possible when filing taxes, but declaring a lower income will make you less appealing to a potential lender. For this reason, those who are self-employed should be meticulous in their bookkeeping and keep all business and personal expenses in separate accounts. In addition to being mindful of the income you declare on your tax return, gig workers and contractors should also try to save up for a higher down payment.

While it's possible to take out a mortgage with as small as a 5% initial payment, your loan terms will be better if you have 10% or 20% to hand over. Plus, paying more upfront makes the entire loan a lesser risk for a lender, which means your application is more likely to be approved. It also means that you're not required to take out a private mortgage insurance (PMI) policy.

2. Federal Housing Association (FHA) loans are best if you have a lower credit score or down payment.

The FHA is an insurer, not a lender, but this government agency does help potential homeowners who wouldn't be approved by conventional lenders find loans with advantageous terms. Maybe your credit score is lower than the recommended 620 or so, or perhaps you're investing in your business and have, therefore, not saved up enough of a down payment. An FHA loan allows you to put down as little as 3.5% of the full cost of the property. Borrowers can decide whether their interest rates will remain fixed or fluctuate with the market when taking out FHA loans as well.

"I'd recommend getting the process started sooner rather than later," says Ky Logue, owner of We Buy Sad Houses, a family-owned real estate firm in San Antonio, Texas. "Get your bank statements, tax returns, and other documents together, and just get started. After having gone through the process earlier this year, I wish I'd have done it a year or two ago. If, for some reason, you're unable to get approved, it's better to know sooner rather than later."

Both Logue and Farrington recommended finding a loan officer who has experience working with self-employed clients seeking loans. "A mortgage broker may be helpful, or a credit union or bank in your area. Some online lenders may not be the best for self-employed individuals," said Farrington.

3. Hard money loans are riskier but speedier.

No, a hard money loan is not paid out in gold ingots. The "hard" part refers to the way in which you assure a lender that you will be able to repay the amount they're giving you. Basically, instead of showing your creditworthiness by exhibiting a low debt-to-income (DTI) ratio and a stellar credit score, you're putting up an existing asset as a way of guaranteeing that you're good for the money.

"Most lenders look for a DTI that is less than 43%," says Taylor. "Your DTI is an important factor because it shows a lender that you won't be using up all of your remaining cash on making your house payment." He recommends putting an extra emphasis on paying down debt, such as student or car loans, while simultaneously saving for a down payment, adding that it's also important to save for closing costs, property taxes, and any necessary maintenance.

If you already own some assets and have a DTI or credit score that's less than ideal, a hard money loan (also known as a private money loan) might be the way to go. Private lenders will also be able to transfer you the funds much more quickly than credit unions or banks will. Bear in mind, though, that this is a winner-takes-all deal; if you are unable to make your loan payments, the property you put up as collateral will be repossessed by the lender.

4. VA loans and USDA loans are there for service people and rural homebuyers.

These are loans designed to offer more options to borrowers who fit certain criteria. For example, the U.S. Department of Veterans Affairs has worked with private lenders to provide loans that are less expensive, more secure, and often don't require a borrower to acquire a PMI policy, seeing as they're guaranteed by the VA itself. VA loans may not even require a down payment, and are offered to veterans, service members, and surviving spouses of those who served in the U.S. military.

For self-employed persons seeking to buy a home in a rural area, there are also loans offered by the USDA. These are similar to VA loans in that they offer options to lower-income borrowers, but they still require the buyer to take out a mortgage insurance policy.

The bottom line is: We live in a time of turmoil and economic unrest, but that doesn't mean that homeownership is out of reach.

"I thought it would be extremely difficult because both my wife and myself have been self-employed for years," Logue explains, "but it wasn't nearly as difficult as I thought it would be. Once we got our documents together and found a good LO, the process was pretty painless."

Whether you're gigging to make ends meet or are chasing your dreams as an independent business owner, that doesn't mean you have to rent forever.