Mortgages: Loans for Freelancers

WITH the job market still soft, many people have turned to contract or freelance work to pay the bills, which increases the challenges involved in qualifying for a home mortgage.

For a time during the credit crunch, “it became a deal-breaker, and freelancers were not getting any loans,” said Sara Horowitz, the executive director of the Freelancers Union in Brooklyn, which provides members with health insurance and other benefits. And it remains difficult today, Ms. Horowitz said, describing the loan-approval process as one of the biggest issues confronting independent contractors, along with deadbeat clients and insufficient work.

As Christopher J. Mayer, the Milstein professor of real estate at the Columbia Business School, noted, “People who don’t fit into the regular check-all-the-normal-boxes these days are disproportionately challenged.”

In the New York area this year, about 2.4 million people worked as independent contractors, up from 2.07 million in 2005, according to Economic Modeling Specialists, which provides work-force data.

If you earn most of your income on 1099s, brace yourself for extra preparation, paperwork and discussion of your financial picture when applying for a mortgage. Dale Robyn Siegel, a mortgage broker in Harrison, N.Y., and the author of “The New Rules for Mortgages” (Alpha, 2009), says independent contractors will need to show that their income is stable and increasing. For some people, that may mean declaring all their income on their tax returns, and not, say, carrying anything over to the next year, even if it means paying more taxes.

Those applying for a mortgage this fall or winter should be prepared to provide backing for year-to-date income. As an example Ms. Siegel cited the case of an independent travel agent with whom she recently worked. She had the agent bring in six months’ worth of commission sheets, which were presented to the mortgage originator.

“They look for consistency,” Ms. Siegel said.

So if you’ve worked for one client for four years, highlight that. If your spouse or partner has worked for a Fortune 500 company for a decade, put him or her on the application.

“It’s especially hard when it’s two freelancers, freelancer couples,” Ms. Horowitz said. “Bankers are concerned that there won’t be steady enough income” to make the monthly payments.

Here’s some other advice for home-buying freelancers:

¶Pay off other debts, including those on credit cards, Ms. Horowitz says, and build a cash reserve, if possible.

¶Pinpoint the source of the down payment. If it’s a gift from Grandma, take along an account statement that shows it’s sitting there awaiting your purchase. If you’re borrowing from your 401(k), take those statements along, too.

¶Prepare for a harder look. Gather tax returns over the last three years. If your income jumped last year, expect to answer questions on why — and whether it will continue, Ms. Siegel said. Lenders may ask for extra documentation and information. If your income declined last year because you started work on, say, a master’s degree, or traveled for three months to South America, volunteer that information.

¶Seek out local banks and credit unions, which are more likely to take the time to qualify you for a mortgage. “They’re a better bet,” Mr. Mayer said, especially if they steered clear of the whole subprime mortgage mess. And, Ms. Siegel added, use a lender who understands the ins and outs of your finances and can decipher your tax return.

The National Association of Realtors says about 16 percent of its member Realtors reported home purchase cancellations in June, mostly because of tighter lending requirements. To prevent that, clean up any credit blemishes before beginning the hunt.

“Be ahead of the game and be prepared,” Ms. Siegel said.

Article source: http://feeds.nytimes.com/click.phdo?i=b0e495135dbadc905b9a6cc0fe19c9b4