5 Tips for Applying for a Mortgage as a Gig Worker
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.
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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