Laying down roots: buying a home as a freelancer
Having a flexible work schedule comes with many benefits, but does it make buying a home more difficult? Here are the thoughts of an independent financial advisor
Buying a house is always a big step. Any property purchase is a serious move that requires both organisation and patience, with hurdles to jump at every step of the process. We’ve all heard the horror stories from people about a “friend of a friend” who was stuck in a property chain for months, or who was denied their mortgage on some minor technicality.
This pressure to get through the process smoothly is even greater for the likes of freelancers. Professionals can spend years curating a work balance that supports their lifestyle, only to have it come back and bite them where the sun doesn’t shine.
Often one of the earliest steps in the buying process – getting a mortgage approved – is one of the most difficult for freelancers. Here’s what you need to know if you’re a sole trader looking to buy, including why investment advice and financial management are so important.
Proving your income requires organisation
Despite the looks you receive from people when you tell them you’re freelancing and applying for a mortgage, the overall approvals process for self-employed people and day job workers is essentially the same. The main challenge comes from showing your lender proof of income in a way that reflects a steady income in the future.
Although it might feel a little challenging, it certainly isn’t impossible. It’s all about being organised and upfront.
Take your taxes into account
It’s easy to see why freelancers like to deduct as much as possible for taxes, but it doesn’t necessarily act as a benefit when applying for a mortgage. Your taxable income after deducting qualified
expenses will be lower, which means you may need to bump up your deposit amount or settle for a smaller mortgage.
Your business structure can create special circumstances
Getting approved for a mortgage can become a bit trickier if you’re set up like a partnership. For one thing, there is usually a delay on using income from a partnership or S-Corp in your application. For another thing, unless you’re receiving a guaranteed income, there’s a chance that profits from the business may not be counted at all. Make sure you do your research and get investment advice beforehand so you know what you’re in for.
What will your lender look at?
This is the question on every budding homeowner’s lips. What exactly is your potential lender going to be looking at when considering your application? Well firstly, and most importantly, they will look at the factors that play into your ability to make your mortgage payments. This includes the stability of your income, the location and industry of your business, and the strength of your business overall.
If you have a proven history of earning a stable income for two years while being self-employed, you shouldn’t really have any more trouble getting approved than someone with a typical 9 to 5. Your debt to income ratio is another vital factor you’ll need to consider, and is calculated by dividing your monthly debt payments by your monthly gross income.
Order a credit report
If you’re looking to get pre-approved (or at least get as approved as early as possible) for your mortgage, it’s a good idea to order a credit report ASAP to see where you stand credit-wise. Comb over it carefully for errors, and use one of the many, many free online tools to check your score so you know what kind of position you’re in.
Get all your documents together
When applying for a mortgage, you’ll be asked to show a lot, and we mean a lot, of documentation. It’s best to get a head start on this by getting your files together now, including:
– Last two years of tax returns
– Last two months of bank statements
– Any extra funds you have, such as retirement funds or stock assets
– Photo ID or driver’s license
– Proof of address
The specifics may vary from lender to lender, but these are the kind of things you will be asked to provide. Give yourself plenty of time to do your homework and, crucially, ask for help when you need it.
Get the support you need
Moving is easier with a helping hand, especially when it comes to your money. Seeking out the help of an independent financial advisor can help make things clear when it comes to your finances, putting you in a stronger position to snap up your dream property. From smart investments and investment advice to tailored mortgage advice, independent support can help you stay on track and meet demands throughout the buying process.
Contact the independent financial and investment advice team at Carrick Financial Management today by clicking here, or call us to find out more on 0191 217 00 07.