Mortgage approval in the gig economy

Over the past several years, the “gig economy” has attracted a lot of attention, and with good reason—it’s inventive, interesting, and offers opportunities outside the traditional 9–5 work.

Read More: Mortgage Prequalification for Gig Workers

Although the term “gig” has long been associated with freelancing, it has now come to refer to a broad economic niche in which self-employed part-timers have succeeded in striking a profitable balance between freedom and income. These employment aren’t always ideal (far from it in certain circumstances), but having the flexibility to plan your own hours is a benefit that’s difficult to quantify.

Nevertheless, lenders aren’t usually as excited about purchasing a property. Many workers in the gig economy find it difficult or even prohibitive to navigate the mortgage process due to uniform processes, strict restrictions, and long-held beliefs about eligible employment.

Some mortgage lenders may find it difficult to understand the self-employment situation, but OriginPoint does not. Speak with one of our knowledgeable loan officers about the various options available to you for getting beyond this obstacle and realizing your goal of becoming a homeowner.

Let’s examine how to maximize your prospects in the gig economy to obtain a mortgage.

The fundamentals: What are gig workers?

A diverse spectrum of workers who are often regarded as self-employed make up the gig economy. They could work as contract workers or part-time workers. They could work in industries that are disruptors. Here are a few instances of gig economy workers:

Examples of gig workers

Independent author

Virtual helper

Drivers for ridesharing services (such as Uber, Lyft, etc.)

Internet marketer

Photographer on the side

Trader for the day

developer of websites

Creator

Personal cook

Editor of videos

Even while it’s normal for workers in these roles to make less money than their colleagues in traditional employment, many gig workers who are fully employed can nevertheless eventually make enough money to be able to buy a property.

Guidelines for handling self-employed income

In today’s financing environment, obtaining a mortgage may sometimes appear like a difficult, drawn-out procedure, complete with many paperwork, tight deadlines, and a thorough examination of one’s income and personal assets. But whether it’s new standards from Freddie Mac and Fannie Mae, suggested rules on income qualifying, or just simplified procedures from your preferred lender, innovation, inclusivity, and ease are becoming more and more characteristics of the contemporary mortgage experience. This is particularly valid when considering the revenue from self-employment.

An estimated 44 million persons (28% of workers) reported being self-employed at some point during a given work week, according to a 2019 Gallup survey (pdf). And that figure is only rising. In the upcoming months and years, there will definitely be an increase in the number of gig workers approaching lenders about mortgages due to this expanding trend.

Getting used to a new situation

Many lenders have always found it challenging to value self-employed individuals. Examining applicants whose money came from unconventional sources introduced an unwelcome element to the mortgage application process. But lenders have adjusted; it’s obvious that times have changed. Lenders are now dealing with a completely new class of borrowers—one that they will need to better understand in order to earn their trust—and their business—with the rise of the gig economy.

Money from self-employment and mortgages

One factor has frequently emerged as the main obstacle to getting a mortgage for self-employed people (freelancers, gig workers, etc.): future income predictability. It can be challenging to forecast revenue in the future because to the occasionally erratic short-term nature of many freelancing possibilities. This makes it challenging to convince lenders that you will honor your pledge to repay the principle and interest in a timely and regular manner. Furthermore, taking a chance on someone in the gig economy—even those who are already making enough money and have good credit—can be difficult because all lenders are risk adverse by nature.

Your method: First, obtain preapproval.

When you start the mortgage process, your income and work history will be the main factors considered. Start by visiting your preferred lender’s website and requesting a pre-approval to streamline the process.

Among other things, you will be required to provide details about your income, assets, and social security number (in order to permit an extensive credit check). Your loan officer should provide a preapproval letter right away if everything checks up. This first screening procedure also assists in determining your financial capabilities.

It’s imperative that you look into preapproval early on in your property search in the current housing market. A pre-approved status signals to sellers that you’re a serious candidate, even if it’s not legally binding. As you start dealing with your lender more actively, it also helps speed up some procedures and mortgage deadlines.

Let’s examine what a good preapproval road plan may include for an employee in the gig economy:

Form 1099

complete tax returns

Credit rating

Ratio of debt to income

Form -1099

If you’re a gig worker attempting to secure preapproval, you probably won’t have access to a W-2 as you would if you were a paid job, but you may provide other documentation of your income, such a 1099 form. In reality, you will have many 1099s if you have worked for more than one company in the last two years. Ensure that these documents are prepared and readily available, and that you send them to your lender along with any additional supporting documentation they may ask for. If there is a digital mortgage accessible, this procedure can proceed much more quickly.

When a W-2 salary form is missing, the mortgage approval procedure takes longer, needs more paperwork, and could not finish with the intended result. Maintaining open channels of contact with your lender is crucial, as is giving prompt, complete answers to any pertinent requests for supporting paperwork. Bank and credit card statements, as well as letters of support in the event that donations of money have been given, may be requested by lenders. Each of these can help increase the likelihood of approving a mortgage.

Complete tax returns

Tax paperwork are usually necessary in order to have a mortgage approved, but when the applicant is a gig worker, they are given more weight and examination. Lenders may want to see your specific income and may ask for forms, schedules, and data spanning many years. This request might be beneficial to you even if it may initially appear difficult because it allows you to demonstrate to underwriters your average earnings over time. Future earnings can then be predicted using this.

Score on credit

Regardless of how you make a living, your credit score will reflect wise financial decisions you’ve made throughout your life, which will increase your purchasing power. When applying for a mortgage, your credit score—a three-digit representation of your creditworthiness—is quite helpful.

Rate of debt to income

Your debt-to-income ratio (DTI) will be taken into consideration throughout the preapproval process. This may be thought of as your monthly gross income divided by the amount of your recurrent debts. You should be in excellent standing if you can demonstrate to your lender that your DTI is less than 40%. Your DTI may be a sign that now is not the appropriate time to buy if it is higher—let’s say 50%. The faster you can raise your income and pay off current obligations, the sooner you’ll be accepted as a qualified applicant for a mortgage.