Getting a mortgage in the gig economy
The “gig economy” has generated a lot of interest over the last few years—and for good reason: It’s exciting, it’s innovative and it opens up possibilities beyond the typical 9-5 job.
While the word “gig” has always had a freelance connotation, in contemporary parlance it has come to describe an entire niche of the economy; a loosely defined sector where part-time workers calling their own shots have found a way to achieve a satisfying blend of flexibility and profit. These gigs are not always dream jobs, (far from it in some cases), but the freedom to orchestrate your schedule is a perk hard to put a dollar figure on.
When it comes to buying a home, however, lenders don't always share this enthusiasm. Uniform processes, rigid guidelines and long-held assumptions about qualified employment have made navigating the mortgage process difficult, sometimes even prohibitive, for many workers in the gig economy.
While the issue of self-employment can indeed be baffling to some mortgage lenders, there are an increasing number of ways to overcome this hurdle and prove to lenders that your unconventional approach to earning a living shouldn’t disqualify you from chasing the American Dream of homeownership.
Let’s take a look at how to optimize your chances of getting a mortgage in the gig economy.
The basics: Who are the gig workers?
The gig economy consists of a wide range of workers who are commonly considered self-employed. They may be freelancers or part-time employees. They may be employed in disruptive industries. Some examples of gig economy workers include the following:
- Freelance writer
- Virtual assistant
- Rideshare driver (think Uber, Lyft and the like)
- Digital marketer
- Freelance photographer
- Day trader
- Website developer
- Personal chef
- Video editor
While it’s not uncommon for workers in these positions to earn less than their conventionally employed counterparts, many fully employed gig workers can still earn enough income over time to make homeownership a reality.
How to navigate self-employed income
Getting a mortgage in today’s lending landscape can often seem like a complex, challenging process, one fraught with endless documents, stressful timelines and a probing analysis of personal assets and income. However, whether it’s updated guidelines from Fannie Mae and Freddie Mac, proposed policies around income qualification or simply streamlined processes from your lender of choice, innovation, inclusion and ease are increasingly the hallmarks of the modern mortgage experience. This is especially true in the context of self-employed income.
According to a 2019 Gallup report, an estimated 44 million people (28% of workers) reported being self-employed at some time during a given work week. And that number is only expanding. Given this growing trend, lenders will undoubtedly be approached by more gig workers looking for mortgages in the months and years to come.
Adjusting to a new reality
There are many lenders that have traditionally had a difficult time appreciating the self-employed. Vetting borrowers whose income was derived from nontraditional sources added a wrinkle to the mortgage process that was not always desirable. However, times have clearly changed, and lenders have adapted. With the emergence of the gig economy, lenders are now interacting with a whole new class of borrowers—one that they will need to better understand in order to gain their trust—and their business.
Mortgages and self-employed income
The difficulty for the self-employed (freelance, gig workers, etc.) to easily obtain a mortgage has often boiled down to one thing: reliability of future income. Given the sometimes fluctuating short-term nature of many freelance opportunities, it can be hard to predict income in future years, thus making it difficult to persuade lenders that you will make good on your promise to pay back both the principal and interest in a timely, consistent fashion. And since all lenders are risk averse by their very nature, taking a flyer on someone in the gig economy—even individuals who are currently generating sufficient funds and possess excellent credit scores—can be a tall order.
Your process: Start with preapproval
Both your employment history and your income will be front and center as you begin your mortgage journey. To make things easier, start by going online and getting pre-approved from your lender of choice.
You’ll be asked to submit information on your income, assets and social security number (to authorize a thorough credit check), among other items. If things look good, you can expect a preapproval letter to be promptly issued by your loan officer. This preliminary vetting process also helps establish what you can afford.
In today's homebuying environment, it’s essential that you explore preapproval in the early stages of your house hunt. While not binding, a pre-approved status telegraphs to sellers that you’re a serious applicant; it also helps expedite certain processes and mortgage timelines as you begin more actively working with your lender.
Let’s see what a sound preapproval roadmap might look like for a gig economy worker:
As a worker in the gig economy trying to nail down preapproval, you won’t likely have W-2 like a salaried employee at your disposal, but you will be able to offer up other proof of income such as a 1099 form. In fact, if you’ve worked for multiple employers over the past two years, you’ll have several 1099s. Make sure you have these forms available and organized, and be sure to submit them to your lender along with any other supporting information they request. If a digital mortgage is available, this process can be expedited significantly.
In the absence of a W-2 wage form, the process to mortgage approval is typically longer, requires additional documentation and may not ultimately result in the desired outcome. The important thing is to establish open lines of communication with your lender and respond quickly and thoroughly to all relevant requests for supporting documentation. Lenders may ask for bank statements, credit card statements and even letters of support if monetary gifts have been made. All these can contribute positively toward mortgage approval.
Full tax returns
While tax forms are always required for mortgage approval, they assume a higher level of importance (and scrutiny) when the applicant is someone in the gig economy. Lenders will want to see exactly how much you earned, and they may request several years worth of data as well as worksheets and schedules. While this request may seem arduous at first, it can actually work to your advantage by giving you an opportunity to show underwriters what you typically earn over time. This can then be used as a predictor of future earnings.
If you’ve made prudent financial decisions over the course of your life—regardless of how you earn a living— this will be reflected in your credit score, and help bolster your purchasing power. Your credit score is a three-digit portrait of your creditworthiness and it’s extremely useful when determining mortgage preapproval.
Another factor that will be brought to bear during the preapproval process is your debt-to-income ratio (DTI). This is essentially your recurring monthly debts divided by your gross monthly income. If you can show your lender that you have a DTI below 40%, you should be in good shape. If your DTI is higher (let’s say 50%) then this may be an indicator that this is not the right time to buy. The quicker you can pay down existing debts (and increase income), the sooner you’ll emerge as a winning candidate for mortgage approval.
Gig workers & mortgages: Additional strategies
OK, you say to yourself, what else can I do to convince lenders that my personal finances are sound and my self-employment will not be an impediment to making timely monthly mortgage payments, should I be approved?
Here’s a thought: Make your down payment more than 20%.
In a time when there are federal programs promising low or no down payment for certain first-time homebuyers, a time-tested strategy to improve your chances of loan approval is to not only meet the 20% suggested down payment, but to exceed it. A weighty down payment can reduce the principal significantly and show your lender that you’re able to wield upfront purchasing power. This can be especially important to offset concerns around small gaps in employment history, 1099s and year-to-year income variations.
Qualified income challenges and solutions
While there is pending legislation at the federal level making it easier for gig economy workers to use non-conventional proof of income, currently there is no guarantee that all lenders will accept forms like 1099s—even if they show healthy income.
Some gig economy workers may choose to go with what is called a non-qualified mortgage (NQM) as an alternative to federally backed mortgages. An NQM is a home loan designed to help homebuyers who are unable to meet the specific criteria of a qualifying mortgage. Not all lenders offer these types of loans, and they certainly have their disadvantages—namely, that the lender is not protected at the federal level if a lawsuit is filed against them. However, a NQM can be an option for some self-employed workers, especially if they have a high DTI ratio. Typically, a large down payment will be offered and the mortgage rate may be higher than that of a conventional loan. This should be considered a last option for prospective homebuyers.
Your best ally to getting a mortgage: Planning ahead
We can’t say this enough: if you’re a freelancer or gig economy worker your optimal blueprint for obtaining a mortgage is simply having a blueprint. Yes, planning is everything.
Knowing in advance that your employment history and income verification will be heavily scrutinized is essential to presenting a sound financial portrait to your lender of choice. Have everything lined up and organized. Check your credit score regularly and prioritize both savings and paying down debts.
As a gig economy worker, you can’t change your source of income overnight, but with a little effort and some expert planning, you can present a sound financial portrait that just might move the needle and convince your lender you’re a good candidate to receive a mortgage.