Jeffrey Harrington's Blog
As the workforce changes and a growing number of companies seek out contractors and freelancers, many Americans find themselves in a gray area when it comes to their income. They may put in full-time hours, but on their taxes they work for themselves.
Mortgage lenders are cautious about who they lend to. They want to make sure you are a low-risk investment who has reliable, predictable income to ensure that they’ll earn money off of your loan.
This can sometimes make it difficult for freelancers, contract workers, or the self-employed. Not only might your taxes be unconventional, but your income could vary depending on the time of the year and the amount of business you receive.
It’s easy to see why many people would be anxious about applying for a mortgage under these circumstances. However, if you’re self-employed, there’s no need to worry. You can still get approved for a mortgage at a fair interest rate--you just need to do a bit of work to provide the right documents to your lender.
In this article, we’ll show you what documents and proof of income you’ll likely need and how to present it to a lender to make the process run as smoothly as possible to get you approved for your mortgage. Here’s what you need to do.
Organize your records
Before applying for a mortgage, it’s a good idea to take a look at your record-keeping process. As a self-employed worker, you’re probably already used to tracking your own income. However, this will help the lender analyze your income easier and move the process along more quickly.
Having a master spreadsheet of your dated invoices, paid amounts, and the names of your clients is a good place to start. You’ll also want detailed, easy to read information for your previous employers, landlords, references, and any other information you think will be pertinent.
Next, gather your tax documents for the last three to five years. As a self-employed worker, you likely file a Schedule C (Form 1040) and a Schedule SE. Make sure you have copies of these forms.
Dealing with deductions
Many self-employed workers write off business expenses in their tax returns. Travel expenses, internet, and other costs associated with doing business are all ways to save by reducing your taxable income. Doing so can save you money, but it can also reduce your net income which is what lenders will see when you provide them with your information.
If you’re hoping to get approved for a bigger loan, one solution is to plan your taxes in the year prior to applying for a mortgage. Make fewer deductions than you normally would to increase your net income.
Be ready to clarify
When a mortgage lender is reviewing your information, make sure you are open and available to provide any information that can be helpful to them in considering your application. Being prompt and accurate with your responses will signal to your lender that you are willing to work with them.
An adjustable-rate mortgage (ARM) offers a home loan with an interest rate that may move up or down. Therefore, with an ARM, your mortgage payments may rise or fall depending on a variety of market factors.
For many homebuyers, an ARM remains a viable home financing option for a number of reasons, including:
1. Lower Interest Rate at the Beginning of Your Mortgage
An ARM enables you to purchase a home that may exceed your price range. As such, it frequently represents an ideal option for a young professional who expects his or her income to rise over the next few years.
With an ARM, you are able to lock in an interest rate for the first few years of your mortgage. For instance, with a 5/1 ARM, your interest rate will remain in place for the initial five years of your home loan. This means that your mortgage payments will remain the same for five years, then rise or fall based on market conditions.
Ultimately, an ARM may help you secure your dream home. In fact, an ARM often allows homebuyers to pay a lower interest rate at the beginning of a mortgage than the interest rate associated with many traditional fixed-rate mortgage (FRM) options.
2. Extra Savings for Home Improvements
If you choose an ARM with a below-average interest rate, you may be able to save extra money that you can use to improve your home.
For example, if you want to overhaul your residence's attic or basement or add an outdoor swimming pool, an ARM may help you do just that. Because you'll know exactly what you're paying for the first few years of your home loan, you can budget accordingly and invest in home improvements that may help you boost the value of your home.
3. Affordable Short-Term Financing
If you intend to live in a home for only a few years, an ARM may be preferable compared to an FRM.
In many instances, an ARM will feature a lower interest rate than an FRM. As a result, if you take advantage of an ARM, you may be able to secure a great house at an affordable price. Plus, if you sell your home before your initial interest rate expires, you can avoid the risk that your interest rate – and monthly mortgage costs – may rise.
Homebuyers should evaluate both ARM and FRM options. By doing so, a homebuyer can assess his or her home loan options and make an informed decision.
If you ever have ARM or FRM questions, banks and credit unions are happy to respond to your queries. These lenders will enable you to evaluate your financing needs so you can acquire your dream house.
Furthermore, consulting with your real estate agent may deliver immediate and long-lasting benefits. Your real estate agent can offer home loan recommendations and put you in touch with local lenders.
Dedicate the necessary time and resources to assess your home financing options, and you can move one step closer to securing your ideal house.
A mortgage could put you on the hook to a lender for longer than a decade. The last thing that you want to do is to enter a financial relationship with the wrong mortgage lender. Engage the wrong mortgage lender and you might enter a legally binding agreement with a company that is on the brink of financial ruin.
Why you may want to hold off on signing that mortgage
Even if the wrong mortgage lender is solvent and not at risk of steep financial challenges, there could be negative fallout. An inexperienced lender might not perform sufficient due diligence to prevent unscrupulous workers from being hired by their organization.
If they don't, your financial data could be at risk. Other reasons why you may want to hold off on signing that mortgage, especially if doing so legally binds you to the wrong lender include:
- Identity theft - Regardless of who you get your mortgage through, you'll share a lot of personal data with a potential lender. Someone at the wrong lending agency could take your information and make illegal purchases.
- Kickback schemes - The wrong mortgage lender might push you toward specific homeowner's insurance providers, home inspectors or home goods retailers. These lenders might get kickbacks off of sales that you make with these vendors.
- Non-competitive interest rates - Should the lender not have a strong balance sheet, you might get a mortgage with less than stellar interest rates. Over time, this type of deal could force you to pay thousands more over the life of your home loan than what you would pay with a lender who had a stronger balance sheet.
- Illegal contract clauses - An unscrupulous lender might add illegal clauses into your mortgage contract.
Why just getting a house is not enough
You might not have hit the bull's eye even if you found a lender to approve you for a mortgage. In fact, you might have just stepped into a business venture that could force you to pay more for your house within five years.
That may happen if you allowed a mortgage lender to talk you into signing a variable rate mortgage. If you've ever had your student loans balloon after a grace period ended or interest rates climbed, you know the pain of having to deal with an unexpected payment increase.
Misuse of your personal and financial records is another negative that might result from entering a mortgage deal with the wrong lender. At the worst, you could become a participant in a Ponzi scheme. This could happen even if you enter a deal with a relative or friend who works in the housing or financial industry.
Protect yourself by performing the same level of due diligence that a home loan provider performs on you. Check financial performance, mortgage interest rates and the types of mortgages that lenders normally go with. For example, you could find out if a lender generally takes risks with subprime mortgages. Also, and this applies to any deal, trust your gut and avoid putting on blinders simply because you want a certain house right now.
What do buying a house, opening a credit card, and getting approved for an auto loan have in common? They all depend on your credit score.
Building credit is a multifaceted undertaking. In a way, this is a good thing--you wouldn’t want lenders to base their opinions solely on one aspect of your financial history. The downside is that understanding just what makes up your credit score can be difficult.
To complicate matters further, there isn’t one standard method for scoring your credit, and different credit bureaus each use their own criteria.
In this article, we’re going to talk about some of the factors the major credit bureaus use to calculate your credit, and give you some ways you can boost your credit.
But first, let’s talk about some of the implications of having a good credit score.
Why credit matters
Typical credit scores range anywhere from 250 to 850. The three main reporting agencies (Equifax, TransUnion, and Experian). Most lenders use a combination of those scores that is reported by FICO.
Most credit reports will rank your category from “bad” to “excellent.” Here’s an example of what a credit ranking might look like:
Good: 700 - 749
Fair: 650 - 659
Poor: 550 - 649
U.S. legislation makes it possible for Americans to receive a free report of their credit score and to challenge and correct the score if it contains inaccuracies.
If you’re thinking about buying a house, opening a new line of credit, or taking out a loan of some kind, then the provider will likely run your credit score. Those providers are going to want to see a return on their investment, so they’ll charge interest.
If you have a high credit score, it tells the lenders that you are a low-risk investment, and therefore they can offer you a lower interest rate, saving you money in the long run.
Components of a credit score
There are five main factors that credit bureaus take into consideration when formulating your credit score. Not all of the factors are treated equally. Your ability to pay your bills on time, for example, is considered to be more important than the types of bills you have. Here’s a breakdown of the five components that make up a credit score:
35% - Bill and loan payments
30% - Current total amount of debt
15% - Amount of time you’ve had credit (since you took out your first loan or opened your first credit card)
10% - Types of credit (cards, loans, etc.)
10 % - New credit inquiries
Quick tips for building credit
It takes time to build credit and improve your score. So, if you’re hoping to buy a home within the next few years, now is the time to start working on your credit. Here are some best practices for building credit:
Set up autopay for your bills to avoid late payments. Even if the service doesn’t offer autopay, you can likely set up recurring payments through your bank.
Settle outstanding debt. Avoiding debt that you can’t pay off will only hurt you more in the long run. Call your creditor and see if they offer debt relief programs. More likely than not they’d rather work with you to ensure they receive some repayment rather than none at all.
Start budgeting the right way. New budgeting software like Mint and “You Need a Budget” are easy to use and link up with your accounts. They’ll help you monitor your spending and start paying off debt.
Don’t open new lines of credit close to when you want to take out a loan. New credit inquiries can briefly lower your credit, especially if you make more than one. Viewing your free credit reports doesn’t count as an inquiry, so feel free to do that as often as needed to check your progress.
Get credit for bills you’re already paying. You can report your monthly rent payments, switch bills into your name that you contribute to, or take out a credit builder loan. All three will help you build rent without changing your spending habits.