How to Get a Home Loan If You Are an Independent Contractor

Freelance workers are considered home loan risks.

Freelance workers are considered home loan risks.

If you’re an independent contractor, you’re part of a big labor-force family that includes more than 10 million workers. This translates to 6.9 percent of the U.S. workforce, according to a May 2017 survey by the U.S. Bureau of Labor Statistics. With a collective financial footprint from 10 million people, it’s still a challenge for many independent contractors to get their foot in the door of homeownership. But even though you may have to jump over a few more hurdles than your friends who work for an employer, the matter of a little more paperwork may be the only thing that stands between you and the keys to your new home.

Independent Contractor Mortgage Loan Requirements

You won’t find a specific program that’s called an “independent contractor mortgage loan” because independent contractors apply for the same types of mortgages as other workers. The application process is the same, but the qualifying process is a little different. What makes a difference is that independent contractors are held to a higher standard of proving income than wage-earners and salaried employees.

Gross Vs. Net Income Challenge

For tax purposes, independent contractors can adjust their gross income by deducting their business expenses. These expenses reduce their gross income to a net income figure that potentially is much lower than their gross. And since they’re taxed on this adjusted income figure, independent contractors get a tax break by writing off their business expenses. But when they’re trying to qualify for a home mortgage loan, this lower income figure may negatively impact their debt-to-income ratio (DTI).

Through a Lender's Eyes

To mitigate their risk, mortgage lenders look to each borrower’s ability to repay the loan, which makes income one of the prime considerations for mortgage qualifying. It’s not just the amount of income but stability and, preferably, projected longevity. In other words, prime candidates will have sufficient, stable and long-term income. And since independent contractors generally have variable income, which may change because of the market or seasonal fluctuations, lenders may require additional paperwork to document a mortgage applicant’s income.

Proving Income to a Lender

Independent contractors don’t have employer-generated pay stubs and W-2 forms to substantiate their income. In part, contractors must rely on the 1099 forms that their customers or clients file with the IRS for income the contractors received during a tax year. When it comes time to qualify for a mortgage, independent contractors typically cannot simply produce a 1099 for mortgage lenders as verification of their income. Depending on the lender, an independent contractor may have to provide other sources of income documentation, including a profit and loss statement and a letter from their accountant, in addition to at least two years’ worth of tax returns.

Credit, DTI and Down Payment

Independent contractors must meet the same credit score, DTI and down payment requirements as other mortgage borrowers. To optimize your qualifying position, hold off on making any large credit purchases, such as vehicles, appliances or furniture, until after you’ve closed on your mortgage. These purchases could lower your credit score as well as increase your DTI.

And if you are able, make a large down payment, which can add an extra measure of assurance to a lender. U.S. News & World Report notes that a down payment of 30 percent or more can push a mortgage toward approval status if income qualifying is otherwise a close call.

Assembling a Robust Paper Trail

If you’re an independent contractor, you can absolutely get a home loan if you meet the qualifying requirements. You just may have to provide your lender “above and beyond” the standard documentation that’s required of other mortgage applicants. But if you keep good business records and you assemble a robust paper trail to prove your income, the rest of the mortgage qualifying process is virtually the same as it is with other borrowers.

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About the Author

Victoria Lee Blackstone was formerly with Freddie Mac’s mortgage acquisition department, where she funded multi-million-dollar loan pools for primary lending institutions, worked on a mortgage fraud task force and wrote the convertible ARM section of the company’s policies and procedures manual. Currently, Blackstone is a professional writer with expertise in the fields of mortgage, finance, budgeting and tax. She is the author of more than 2,000 published works for newspapers, magazines, online publications and individual clients.

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