In the two years since the start of the pandemic, many people have found themselves out of a job. More than 114 million people in the United States started searching for another way to make ends meet.
Companies had to find ways to keep their business afloat, often with alternative staffing. This caused a major expansion of independent contracting positions; many individuals started their own business or turned to freelancing.
Along with shifts in the housing market, the pandemic economy also transformed many people’s plans for becoming a homeowner. If you’re an independent contractor and are looking to buy a house or become a landlord in Houston, Texas, here’s what you need to know.
What Lenders Look For
All lenders expect to approve loan applications based on the same qualifications. They look for stability with income and employment as well as a good credit score.
If you’re self-employed, lenders will be interested in a few other factors. You’re considered a self-employed borrower if you’re not a W-2 employee or have at least 25% ownership of a business.
You’d be regarded as self-employed if you’re a business owner, freelance contractor, provide seasonal work, or derive any other side income. All lenders will want to know the nature of your business, regardless of what type of contract work.
They’ll need to know where your operation is located and what services your company offers, to ascertain whether it’s lucrative. They’ll want to look through your business financials to see how strong the operation is, not only at present but into the future as well.
Types of Loans
People who are self-employed are typically eligible for standard types of loans. These include conventional loans, VA loans, USDA loans, FHA loans, and jumbo loans.
You should research the types of loans which would be best for your specific needs. VA loans, for instance, are not available to people who hope to borrow funds for a “fixer-upper.”
If you’re in the market to flip a house as an alternative means of income, you’ll have to settle for another option, such as a hard money loan or home equity loan.
If you’re not officially employed by a company, lenders treat you as the business. You’ll need to have as many of the following items available to verify your self-employment and complete your application:
- A list of your current clientele
- Verification you work with a CPA (certified personal accountant)
- All state and business licenses you currently hold
- Evidence of business insurance coverage
- “Doing Business As” documentation
Once you’ve firmly established your employment status, you’ll have to prove you have sufficient income to pay your mortgage on time for the foreseeable future. Any potential lender will expect to see proof of income and employment for the previous two years.
Your documentation should include your personal tax returns and business tax returns, as well as your profit and loss forms (usually a Schedule C, Form 1120S, or K-1, depending on how you filed your business).
If you’ve been self-employed for less than two years, you’ll have to verify that your company has been operating for a minimum of twelve consecutive months. Then you’ll have to provide tax forms from your previous employer for the two years that precede that time.
You’ll also want to collect any information that documents your liquid assets and savings. This will play a factor in proving you’re able to make a down payment of at least 20% of the purchase value.
Check Your Debt-to-Income Ratio
There are several things you can do on your own to boost your application and get lender approval. First, take a look at your debt-to-income (DTI) ratio, which should be less than 45% (and preferably less if you can swing it).
A lender wants to see you’re reliable enough to pay your debt … not to mention you’ll want to get your other debts under control before you apply to accrue even more.
For you to calculate your DTI, total your monthly recurring debt and divide that by your monthly income before taxes are taken out. Debt includes such items as credit card payments, student loans, phone equipment, and car loans.
Don’t include your monthly utilities, groceries, or other subscriptions you might pay for. These fluctuate and aren’t treated as accrued debt.
Check Your Credit Score
Your credit score is one of the biggest factors on which lenders base a decision to approve your loan application. A great way to understand credit is through your DTI.
The lower your DTI, the higher your credit score. The higher your credit score, the more favorable your application will be.
Many banks offer free FICO scores, but a lender won’t approve you simply off those. It’s a good idea to keep your eye on your score for a good baseline.
Lenders will usually want you to have at least a minimum credit score of 580 to 620, depending on the type of loan you’re applying for. If you’re not quite there, focus on lowering your DTI.
Separate Personal and Business Expenses
One of the most essential things you should do when you’re an independent contractor is to keep your personal and business expenses separate. This includes equipment, monthly bills, and memberships.
If you feel comfortable with the idea, it might be suitable to apply for a business credit card. This will enable you to start building credit for your company, which will give you extra appeal if you can maintain good credit both personally and in terms of your business.
Applying for a mortgage when you’re self-employed will require you to pass through a few extra hoops. There’s no guarantee you will get approved, even if you get through them.
Get your debt under control and make sure your business has been running for at least one year with a positive history of income that bids fair to continue. Get your documents in order and speak with at least a few different lenders to assess your options.
Are you ready to start looking for your first property in Texas? Contact the professionals at Green Residential. We’ll help you find the right house that meets your needs and get you moving into your new home in no time.