To say the coronavirus pandemic has upended everyone’s plans this year would be an understatement. Millions of people were laid off and had to adjust their financial goals as they coped with the realities of the COVID-19 outbreak.
Perhaps you were among them and have since landed a new position as a contract worker, enabling you to continue moving forward despite the ongoing health crisis. Maybe your household finances have even been relatively stable this year, despite the transition to contracting from full-time employment.
Now you’re ready to buy a house, and it’s a good time to do it. Interest rates hit record lows this year, which helps explain why, in the midst of a pandemic, home ownership rates were 2.6 percentage points higher in the third quarter of 2020 than they were at the same time last year.
However, the mortgage application process will look a bit different for you as a contractor than it would have as a full-time employee. We’ll break down everything you need to know in the following sections, but the biggest thing to keep in mind is that you’ll need to provide proof that you earn enough money, on a regular basis, to cover your mortgage payments.
What’s the difference between buying a home as a contractor vs. as a full-time employee?
When a borrower applies for a mortgage, lenders look at a few key factors, including credit score, credit history and income. Consistent income is essential to determining whether a borrower will be able to repay their loan, so lenders need to see proof of how much you make.
But as a contract worker, your income may vary month to month, particularly if you’re a seasonal contractor. Even if you work year-round, some periods may be more lucrative than others, especially depending on the length of your invoice cycles.
That doesn’t mean you won’t qualify for a mortgage — it just means that you’ll need to apply with lenders that are willing to provide mortgages to contractors, and you may have a more paperwork-intensive application process than someone working as a full-time employee.
Here’s what lenders will need to verify:
- How long you’ve worked as a contractor
- How much you earn and whether it’s consistent income
- The type of work you do and whether there is sufficient demand for your services
- The likelihood that you will continue to earn enough to make your payments
Keeping any records related to your contracting position, including a contract that specifies the terms of the work — as well as how much you’ll be paid and when — may be useful during the application process. You’ll also want to keep records of paid invoices and bank statements, in case the lender asks for those.
The Federal Housing Administration (FHA) issued new guidelines for self-employed borrowers during the coronavirus pandemic, requiring that lenders verify that borrowers are currently working and that they can expect to continue receiving sufficient income to make their payments. If you’re considering a government-backed FHA loan and meet the requirements, being able to provide signed contracts, dated invoices or recent business receipts can help you qualify.
Even if you apply for a non-FHA loan, the more supporting documents you can provide, the better chance you’ll have of reassuring lenders that you’d be a reliable borrower.
What information do you need to provide lenders?
Lenders need to verify that you have consistent income and that you earn enough to pay your mortgage. When a W-2 employee applies for a mortgage, their pay records will usually suffice for proof of income.
But if you’re self-employed, expect to provide extensive documentation to show you earn a regular income. Requested documents may include:
- Two years of personal income tax returns
- Two years of business tax returns
- Profit and loss statements for your business
- A statement from your accounting professional that explains your income
- IRS transcripts to verify your information
The exact documentation you need will depend on your lender, as well as how long you’ve been self-employed. Some lenders may only ask you for one year of personal income tax returns, and you may not have to provide your business returns if you’ve worked for yourself for five years or more.
Of course, if you became a contractor this year, you’re not going to have several years of business returns or a profit and loss statement. But again, any documents demonstrating that you are indeed working and earning a steady income will help your case. And if you decide to work as a contractor in the long term, you can think ahead about the types of documents you’d need if you choose to purchase another home down the road.
How can you increase your chances of approval?
In addition to documenting your income and any work contracts, there are other ways to boost your chances of getting a mortgage:
- Maintain good credit. Your credit score is one of the biggest factors in a mortgage approval. Limit the amount of debt you carry, make all of your current payments on time and avoid opening new accounts before you apply.
- Increase your down payment. Although down payment requirements vary based on lender and loan type, many programs have a 3% minimum. But if you can increase your down payment — either through a down payment assistance program or help from friends or family — you may boost your chances of getting approved.
- Establish an online presence for your services. If you’re able, create a website or portfolio showcasing the type of contracting work you do. Client agreements permitting, share examples of recent work and even testimonials proving that you have a customer base and are steadily working. Include contact information so that a lender can easily reach you if they need to verify any business information.
Alternatives to self-employed mortgages
Not all lenders will work with self-employed borrowers, but the need to accommodate contractors could grow post-pandemic. The research firm Gartner found that 32% of companies surveyed are hiring contingent workers to replace full-time employees as a cost-saving measure. If businesses increasingly opt for contractors, the demand for self-employed mortgages could rise as well.
Still, if you find it difficult to get approved for a mortgage as a contractor, there are other ways to finance a home purchase. One way is with a no-income verification loan, which allows you to use bank statements or other assets to qualify. Keep in mind that you’ll likely need a high credit score and down payment for these loans, and you may pay higher interest than with a traditional mortgage.