You want to buy a home, but you’re struggling to secure financing due to your status as an independent contractor. This isn’t uncommon if you’ve been applying with traditional banks and credit unions, and for a few reasons. The rules are more stringent since you don’t earn an income from traditional employment, and the lender will likely use your net income when assessing your eligibility for a mortgage.
Luckily, there are lenders offering home loans to independent contractors who may not qualify elsewhere. Read on to learn more about qualifying for a traditional mortgage as an independent contractor and a viable alternative if you aren’t having much luck.
Who is Considered an Independent Contractor by Mortgage Lenders?
Independent contractors are individuals who perform work on behalf of companies but aren’t classified as full-time or part-time employees. Instead, their compensation is based on the number of hours they work on a weekly or monthly basis, or they are paid on a project-by-project basis.
At tax time, independent contractors are issued a 1099 from the entities they do business with if their total annual earnings exceed $600. They must report the income on the form on their tax returns and remit any taxes owed to the IRS or state tax authority (if applicable) since taxes are not withheld from general contractor payments.
Is It Harder to Buy a House as an Independent Contractor?
It depends on the financial situation of the buyer. Yes, the lender may dig a bit deeper to confirm your employment history is sufficient, but you’ll also have to meet the same income, credit and asset requirements as other borrowers.
The other major challenge is how much of your income can be included in the mortgage application. Independent contractors are allowed to write off certain business expenses and take other deductions to help them save on tax time. Unfortunately, this can be very problematic when it’s time to apply for a home loan, as you can only use your net income. If it’s low or you took a loss due, you may not qualify for a big enough mortgage, if you qualify at all.
You may not be completely out of luck, though. If conventional or government-backed home loans aren’t an option for you, a private lender may be worth considering. More on that shortly.
How Long Do You Usually Have to Be Self-Employed to Secure a Mortgage?
Most lenders require self-employed borrowers to work in the same industry for at least two years. However, there are sometimes exceptions to this rule, particularly if you’ve recently become an independent contractor but have extensive experience in the same industry or line of work.
How Independent Contractors Can Qualify for a Mortgage to Buy a House
There are four primary factors considered by lenders when deciding if you’re a good fit for a home loan.
Lenders will pull credit reports from the three major credit bureaus – Experian, TransUnion and Equifax – and compute the average of your three credit scores. It should be at or above the minimum criteria to have a shot at qualifying for a home loan with a competitive interest rate.
Credit score requirements vary by loan product, and some lenders have overlays that raise this figure even higher. However, a 620 or higher is generally the lowest you can go for conventional loans. Government-backed loans are a bit more flexible, depending on the product you select. For example, FHA loans go as low as 580 (or 500 with a 10 percent down payment), but you’ll need a 640 score for a USDA loan.
Keep in mind that a higher credit score demonstrates to the lender that you’ve responsibly managed your debt obligations in the past. Consequently, there’s a higher probability that you’ll repay what you owe. But a lower credit score indicates you may have had challenges, making you a risky borrower in the eyes of lenders as the risk of default is higher.
You’ll also need to provide proof of your employment as an independent contractor. A copy of your business license or filing with the state may suffice. You may also be asked to provide a signed letter from a Certified Public Accountant (CPA) confirming that you’ve worked as an independent contractor for at least two years.
Be prepared to send the following documents to the lender:
- Personal and business tax returns for the past two years
- 1099 forms from clients
- Three months of recent bank statements
- A year-to-date profit and loss statement
The lender will use this information to compute your earnings and debt-to-income (DTI). Your DTI, which is the percentage of your income that’s spent on monthly debt obligations (including the new mortgage payment), should be no more than 45 percent. However, there are loan programs that permit a higher DTI. Or you could have more wiggle room if you have a strong credit rating.
Unless you’re taking out a VA loan or USDA loan, you’ll also need to make a down payment. Here are the requirements by loan type:
- Conventional loan: as low as 3 percent
- FHA loan: 3.5 percent (or 10 percent with a credit score between 500 and 579)
- USDA loan: no minimum down payment requirement
- VA loan: no minimum down payment requirement
- Jumbo loan: 5 to 20 percent
Where Can You Get a Mortgage as an Independent Contractor?
If you’re tired of being turned down by banks and credit unions, give Angel Oak Mortgage Solutions a try. It’s a full-service mortgage lender that offers innovative home loan products to borrowers from varying financial backgrounds.
You could be eligible for their bank statement home loan, which caters to self-employed borrowers. Loans from $150,000 to $3 million are available, and you can use the funds to purchase a primary home, second home or investment property. Plus, you won’t have to worry about providing tax returns or loads of financial statements. All you need is two years of self-employment and 12 or 24 months of business or personal bank statements to be considered for a mortgage.
Let the team at Angel Oak Mortgage Solutions help make your homeownership dreams a reality. Submit the online form to learn more about the Bank Statement Home Loan, 1099 Income Loan, Asset Qualifier Loan, or other mortgage products that could be available to you. Or you can get pre-qualified to take the first step towards purchasing a home today!