5 Tips for Applying for a Mortgage as a Gig Worker
by Maurie Backman | Updated July 19, 2021 - First published on Dec. 2, 2020
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The freelancer and gig economy is booming. Often, the flexibility attracts people to this type of employment. But all of that freedom comes at a price -- a lack of financial stability. Not only can that make budgeting and saving money difficult, but it can also make it tough to qualify for a mortgage when you're ready to buy a home.
If you're in the market for a mortgage but are a gig worker without a predictable paycheck, you'll need to work extra hard to get approved. Keep reading for our top tips, and check out our guide to getting a mortgage while self-employed for even more in-depth information.
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1. Be prepared to offer up proof of income
When you're a salaried worker, proving that you earn enough money to keep up with your mortgage is easy. You just show prospective lenders a copy of your pay stubs or W-2 form.
But when your income is variable, it's a lot harder to convince mortgage lenders to take a chance on you. You're more likely to get approved for a home loan if you show proof that you've been earning money steadily for years.
To this end, dig up tax returns and 1099 forms (which, if you're self-employed, you'll receive from clients you work for who pay you at least $600 a year) from the past several years. If your income varies from month to month but you generally earn, say, $80,000 a year, you can prove that that's the case by providing your lender with a few years' worth of income data.
2. Make sure your credit is solid
The better your credit score, the greater your chances of getting approved for a mortgage. A high credit score proves you're able to keep up with your bills. If you're a gig worker, you'll really need strong credit to show you can pay the bills despite your variable income.
A score between 740 and 799 is considered "very good" by FICO® standards, while a score of 800 or above is considered "exceptional." If your score is lower, hold off on applying for a mortgage until you're able to raise your credit score.
You can boost your credit score by:
- Paying incoming bills on time.
- Paying off debt (namely, credit card balances).
- Checking your credit reports for errors (and correcting any mistakes you find).
3. Save for a sizable down payment
The more money you put down on your home, the less risky you look to a lender. Start by saving a down payment of 20% or more, if possible. You'll not only avoid private mortgage insurance, but you'll prove you have a respectable level of cash reserves -- despite your non-steady income.
4. Keep your debt-to-income ratio low
Your debt-to-income ratio (DTI) is a measure of how your outstanding monthly debts relate to your income. The lower that number is, the greater your chances of getting approved for a mortgage.
If you have outstanding credit card balances to pay every month or a large auto loan in your name, pay off some of that debt (if you can). Doing so could bring your DTI down and increase your chances of getting a mortgage.
5. Know what you can afford
You may qualify for a certain mortgage based on your earnings history, credit score, down payment, and DTI. But remember, as a gig worker, you're really the one in the best position to determine how much of a mortgage payment you can keep up with on a monthly basis.
You can use our mortgage calculator to estimate monthly payments for mortgages of different sizes.
As you're budgeting for a mortgage, a look at your earnings history. Be mindful of the ebbs and flows of freelance income. A good rule of thumb is actually to assume the worst when it comes to your future earnings potential. If you typically earn between $3,000 and $6,000 a month, assume you'll only take in $3,000 from this point onward, and get a mortgage that reflects that income level.
Getting a mortgage as a gig worker can be a challenge, but it's certainly not impossible. And as a bonus, once you're able to buy a place of your own, you may be eligible for a generous home office deduction if you do your job primarily out of the house. That could result in some serious tax savings that would make owning your home more affordable.
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About the Author
Maurie Backman is a personal finance writer who covers everything from savings to retirement to healthcare. Her articles have appeared broadly on major outlets such as CNBC, MSN, and Yahoo.
We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.
