Freelance work can be rewarding both financially and emotionally, yet there are also lots of challenges faced by people who work for themselves that do not apply to those with a permanent position within a larger organization.
One excellent example of this is the process of getting a mortgage, which is undeniably more of a challenge for the self-employed. So what hurdles do freelancers have to overcome when securing a home loan?
Proof of income
The most significant barrier to home ownership faced by freelancers is being able to prove that they make enough money to give a lender confidence in their ability to keep up with the loan repayments.
While someone with a salaried job might need just three months’ of paychecks to support their mortgage applications, a freelancer will typically need tax returns covering at least the last two years.
Some lenders will also want to see detailed bank statements which show that you have the required deposit, while also demonstrating that you are responsible when it comes to money management.
If you have an accountant who handles your tax returns and finances for you, then they should be able to supply the necessary documentation to prove your claimed income. If not, you will need to procure these documents from the relevant organizations yourself.
Speaking of tax returns, it is worth noting that overdoing it with deductions to try and minimize your tax bill might end up meaning that lenders won’t approve you for as large of a mortgage as you would like. It is all a bit of a balancing act, and if you know that you will want to apply for a mortgage in a couple of years, it could pay to avoid claiming certain deductibles in the short term.
Lots of things play a part in determining the affordability of home loans, such as the mortgage rates from this article. While there are certain factors that you cannot control, there are others which self-employed people can influence to drive down the cost of repayments and boost the likelihood of being approved in the first place.
Close to the top of this list is your credit score, which is inextricably tied to your credit history. You should aim to keep your history as pristine as possible, which means repaying any other loans on time, keeping up with your credit card payments, and generally avoiding the accumulation of large debts.
Freelance business owners should also remember that you can only build a good credit score if you have some credit history to your name. So do not be afraid to use credit cards and take out other loans; just remember to adhere to the terms and pay before deadlines.
The good news is that you do not need to stay in the dark about your credit score, as there are various agencies that will provide you with access to it, often free of charge. Some will conjure up a full-blown credit report that pinpoints any problems with your current score and suggests ways to make improvements, so this could be a good investment for self-employed people looking to secure a home loan.
Joint mortgage applications
This is obviously not an option for everyone, but arguably the best way to get a home loan as a freelancer is to apply jointly with someone else; preferably someone who has a full time job.
Having two incomes available will give lenders more confidence in you as prospective customers, and this should also significantly increase the maximum amount you can borrow.
Ultimately, while getting a mortgage as a freelancer is definitely trickier, it is far from impossible, so long as you know what to do.