Income Verification for Freelance/Contractors

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With the advent of social media influencers, freelance bloggers, and other digital revenue streams, as well as more traditional freelance and independent contractor employment, there is often some confusion around how income is verified for purposes of qualifying for a mortgage.

Mortgage lenders will use your income information (as well as assets, liabilities, credit score, etc.) in order to pre-qualify you for a home loan. This is an important first step in the process – in a competitive market such as San Jose and the greater Silicon Valley area, most sellers will not even consider offers from prospective buyers who are not pre-qualified. During the qualification process, lenders will typically send out a Verification of Employment form to the applicant’s employer, which verifies employment status, pay rate, and start date. Applicants will also be asked to provide pay stubs that cover the previous 30 days and two-years of W2s. However, the documentation is not as simple when you are self-employed or work as a freelancer.

Self-employed, independent contractors, and freelancers do not receive regular paychecks, but instead bill clients for products or services. For some, this is their sole source of income, and for others, they may have a traditional job and also an income stream from a freelance side gig. In either case, the mortgage company is going to want to verify two years of consistent (preferably increasing) income in order for it to count for mortgage qualification.

Changes to your circumstances, such as a side gig becoming your sole source of income, starts the clock over. You will need to have two years of documentation at your present employment for the income to be considered. This is because the lender wants to ensure that you can successfully handle the transition from employee to self-employed, without a negative impact to earnings.

Required Documentation

Since self-employed or independent contractors do not have W2s and regular paystubs, the mortgage lender may request to see the following:

  • 1099s – For independent contractors, companies that hire you will report what they pay you to the IRS and to you through a 1099.
  • Taxes – While all prospective home buyers will have to provide copies of their taxes (all forms, including all schedules) for mortgage approval, self-employed individuals who operate a business as a corporation or partnership will also need to provide copies of tax forms filed for the business.
  • Profit/Loss Statements –  Showing income/losses, completed by a CPA (if taxes for the year have not yet been filed). These may also be required for some 1099 recipients.
  • Proof of Business – Copies of a business license, or a signed affidavit by a CPA proving that the business has been in operation for at least two years.
  • Bank statements –  Copies of personal and business bank statements.

The lender is essentially looking for stable income, with a solid history of at least two years. Lending to self-employed and freelancers/independent contractors is considered more risky than lending to people with more traditional sources of income. This is because income can fluctuate based on business conditions and other factors, and the potential borrower needs to be able to prove that they have the necessary consistent income and resources to cover the mortgage and their other expenses in the event that the business experiences a slow period.

Some lenders may be a bit more stringent about credit scores, but it depends on the type of mortgage and mortgage program. Some programs, such as FHA do not require a high credit score for people who are self-employed.  The minimum score for FHA loans is 580 when using the minimum down payment. For conventional loans, the minimum credit score is 620.

The qualification process may take a little longer if you are self-employed or a contractor, since the verification requires more documentation and a greater level of scrutiny. However, it is possible to successfully purchase a home without “traditional” income from an employer. Don’t let this prospect deter you from purchasing a home if you are ready to make the leap.

Let my team at Keystone Realtors® meet all your real estate needs. We can help you find the perfect investment property to get started, and provide advice on your investing journey. Paul Phangureh has over 16 years of experience in buying and selling in the Santa Clara and San Mateo County areas, specializing in the high-end, luxury market, as well as commercial and multi-use real estate. We can help you navigate the process of getting started with real estate investment. Visit our website at Keystonesv.com for listings and information. You can contact Paul at 650-924-2544, or email at [email protected].