Gig Economy: How to Get a Mortgage as a Contractor

Being self-employed or a contractor in the gig economy can come with many benefits, including flexible hours, setting your own fees, and more, depending on the job. But gig work can also mean irregular income and no employer benefits like paid time off and company-covered health insurance. And, if you’re looking to buy a home, qualifying for a mortgage may require a few extra steps.

Before we dive into how to get a mortgage as a gig worker, let’s clarify what working in the gig economy means.

What Are Examples of “Gigs”?

The “gig economy” refers to the growing job market of temporary, contract, and freelance jobs. A 2021 Upwork survey found that 59 million Americans had performed freelance work in the prior 12 months, representing 36% of the U.S. workforce. 

There are gig workers in almost every industry. It’s likely that you or someone you know is earning extra cash on the side or even making a comfortable living as a full-time independent contractor or freelancer.

Think of the Uber driver who gets you home safely when you’ve had too much to drink, the DoorDash driver who delivers your dinner, or the Airbnb homeowner who rents their house for your vacation stay. It can also be a freelance writer, tutor, graphic designer, babysitter, or another type of job.

Getting a Mortgage with a Gig Economy Job

If you’re a worker in the gig economy and want to buy a home, the qualification process to get a mortgage is slightly different. This is because mortgage lenders require proof of employment income—which is typically done through a W-2 or recent paycheck—and freelancers and contract workers typically lack traditional income documentation.

For contract workers, lenders want to know the stability and viability of your employment, along with your monthly income, which they expect will fluctuate. They need to see that your income is high enough to make your mortgage payments, that your income is stable, and that you have a history of repaying your debts.

Typically, self-employed and contract borrowers need at least two years of self-employment income to qualify for a mortgage, shown by providing two years of tax returns and 1099s. But those who have been self-employed for only one year may still qualify if they were previously a  W-2 employee in the same field with comparable or higher income. 

There are also some lenders that will look at your assets as a way of qualifying. Contractors and self-employed borrowers may be able to qualify by providing bank statements that prove they have the stability to make their monthly mortgage payment. 

The team at New Way Mortgage can help you figure out how to qualify and what loan options and documentation will be required. 

Getting Approved for a Mortgage as a Contract Employee

If you’re a self-employed freelancer, contractor, or another type of gig worker, these are the things that can help you get a mortgage.

Show that your income is stable or increasing.

It’s common that mortgage lenders want to see your tax returns from the past two years. Some fluctuation is expected, but a significant decrease in income from one year to the next could signal that your gig business is on the decline.

After the pandemic caused downturns and income losses for many businesses, Fannie Mae and Freddie Mac issued updated guidance in 2020 on how mortgage lenders should determine income stability. This included a requirement for self-employed mortgage applicants to provide a year-to-date profit-and-loss statement, plus business bank statements for the most recent months.

Focus on keeping a good credit score. 

When applying for a mortgage, lenders will pull your credit report and FICO® score. While loan programs have different credit requirements, the better your credit is—and assuming you meet other underwriting criteria—the more likely you will be approved for a mortgage. (This applies to all borrowers, whether you’re a gig worker or a W-2 employee.)

Keep your debt-to-income ratio in balance. 

Lenders look for a low debt-to-income (DTI) ratio, the percentage of your monthly income that goes toward paying your debts. Ideally, you want your DTI to be 43% or lower.

It’s important to note that when applying for a mortgage as a gig worker, you may have many business expenses deducted on your taxes. Since mortgage underwriters typically look at income after expenses, those deductions that save you money at tax time could also end up reducing your bottom line, which can impact your debt-to-income ratio.

Have cash reserves in the bank. 

Your mortgage payment will be due each month, even when your work is slow and bringing in less income. Lenders may want to see that you have money in savings or an emergency fund to cover your mortgage, regardless of how much gig work you had that month.

Put money down.

Making at least a 20% down payment on your home purchase can also help qualify you for a mortgage. If you have good credit and stable income, making a larger down payment offers even more assurance to lenders.

Planning for a Mortgage as a Gig Worker

If you’re considering buying a home in the next few years while you continue to earn a living in the gig economy, take these steps to make yourself more attractive to lenders:

• • Keep your work consistent: Apply for a mortgage after you’ve been self-employed for two to three years with a consistent track record of solid earnings.

• Try to improve your credit score: Check your credit reports to identify any errors, and contact the credit bureau to correct them. Pay down debts, and don’t apply for a new loan or credit card in the months leading up to applying for a mortgage. 

• Build up your savings: You’ll need money for a down payment, and having extra funds put away shows lenders that you can cover your monthly mortgage payments and home repairs when your gig work is slow. 
• Keep your business records in order: Keep track of invoices and expenses, and prepare an updated earnings statement quarterly so lenders can easily understand your business income. Retain records when filing your taxes, and be sure to keep your business and personal finances separate, with different bank accounts and credit cards. 

For more information on how to qualify for a mortgage as a freelancer or independent contractor in the gig economy, watch this video with Aaron Clowes of New Way Mortgage, as he breaks it all down for you:

Whatever your gig may be, getting your mortgage pre-approval is the first step in buying a home. Contact the strategic team at New Way Mortgage to get started. Our mortgage brokers have access to all types of loan programs that make the most sense for your employment situation. Give us a call today at 916-465-6639.