Bonnie Stone's Blog
While working from home and making your own schedule, either freelance or as a contract worker, allows for a particular type of freedom and control of schedules, a dress codes, income limitations, and your life, when it comes to qualifying for a mortgage, your 1099-MISC status comes with some drawbacks.
The so-called “gig-economy” places workers squarely in the “self-employed” column with its tax breaks that reduce the bottom line, letting you keep more of the money you work for. Unfortunately, the mortgage banking industry has not completely caught up to the new reality. The challenge is differing between “provable” income while retaining the tax advantages of self-employment.
Conventional Mortgage Lenders
Typically, the mortgage industry bases your credit-worthiness on provable income. Underwriters (the folks tasked with determining your creditworthiness) use W-2 forms and tax returns to qualify homebuyers for a conventional loan. Without these standard forms, proving your income is difficult for many self-employed would-be homeowners.
Conventional lenders follow a prescribed formula to prove income and credit-worthiness, so many mortgage underwriters merely look at your after-tax and post-deduction income. The result for 1099 workers is a lower provable income than the reality of most entrepreneurs or self-employed workers situation. Certain expenses such as one-time investments in equipment or product, and some depletions or deductions for your existing home, add back into your income on paper, but qualifying with 1099 income requires extra effort on your part.
Unconventional Mortgage Lenders
Conventional lenders offer conventional loans. These are loans qualified for selling on to FreddieMac or FannieMae. Alternative loans—those provided by smaller lenders and investors that hope to realize a better return than a conventional loan offers—might be a more likely option for the self-employed. These loans are not without some added risk. To make them attractive to investors, the interest rate on non-conforming loans typically is higher, and down-payment requirements might be higher as well. Some alternative mortgages with lower interest rates or lower down-payments might be available to self-employed borrowers with exceptionally great credit or an extensive portfolio.
Plan two years in advance: position yourself to qualify for a loan. Once you know where you stand, you can work to move into better condition to qualify. Organize your books and keep accurate financial records. You need to prove your income, so use an invoicing system to show receivables. Often, lenders want to look at two or more years of both tax returns and bank statements. They want to see an average over 24 months to determine your annual income and your ability to pay your mortgage. Keep profit and loss statements, expense reports and a balance sheet. If your accounting is complicated, get professional help. Utilizing a professional bookkeeper and CPA might just save you money and show you have solid business intent.
Save up a more substantial down payment: The more you put down, the less you need to borrow. Showing consistent savings also proves your ability to set money aside and prioritize savings and spending.
Improve your credit score: Sometimes it seems your credit score doesn’t make sense. After all, the calculations and formulas used remain a mystery. You can make significant strides in increasing your score though, by paying attention to two things: payment history and credit utilization.
- Payment history is just what it sounds like—the history of how you pay your bills. Avoid paying late and try to pay early. Your payment history makes up more than thirty-three percent of your total score.
- Credit utilization—the ration of how much credit you have available to how much you’ve used—is another large chunk of your score. If you have a credit card with $2500 available, and you’ve only used $250 (on average) you are using just ten percent of your available credit. On the other hand, if your card only has $250 available and you’ve used just $125 you have used half of the available credit. The higher the percent of your combined usage to your combined credit (all credit cards, personal loans, vehicle loans, etc.) the lower your score.
- The remaining parts of your credit score relate to the length of time you’ve had credit, how many accounts are new, how often you apply for credit and a mix of other bits of information. To help this area, avoid applying for credit cards, car loans or personal loans (furniture, appliances, etc.) for the two years leading up to when you apply for a mortgage. When you pay off a credit card, cut up the card or put it away, but avoid closing the account. Older accounts have a higher point value compared to newer ones, even if you aren’t currently using them.
Start now working on your credit and establishing the best accounting practices to prove your income. Speak with a mortgage lender for information on what it takes to pre-qualify for a loan in your situation.
Although you might have a home selling timeline in place, there may be instances where changes to your plan are required. These include:
1. You are listing your home in a buyer's market.
If you add your house to a buyer's market, you likely will face lots of competition from rival home sellers. As such, it may be difficult to enjoy a fast, profitable home selling experience if you fail to promote your residence accordingly.
To succeed in a buyer's market, you'll need to be patient. But if you can find ways to differentiate your house from the competition, you could maximize your home sale earnings.
Oftentimes, it helps to revamp a house's curb appeal. By mowing the front lawn and performing various home exterior improvements, you can help your house make a positive first impression on potential buyers.
You also should spend some time removing clutter from inside your house. That way, you can make it easy for buyers to envision what life may be like if they purchase your home.
2. You are struggling to stir up interest in your house.
After you add your house to the real estate market, it may be several weeks or months before a buyer submits an offer to purchase your residence. And if you're committed to optimizing the value of your house, it is important to wait for the right offer before you finalize your house sale.
If your home initially fails to stir up interest among buyers, there is no need to worry. In fact, there are many things that you can do to ensure your house hits the mark with buyers.
Generally, it is a good idea to establish an aggressive initial home asking price. This price should account for your house's condition, age and the current state of the real estate market.
It typically is beneficial to consider the homebuyer's perspective as well. Because if you understand why a buyer may be interested in your house, you could discover ways to help you house stand out in a competitive real estate market.
3. You have yet to hire a real estate agent.
Finding a real estate agent who can help you sell your house is key. Yet if you fail to employ an expert real estate agent right away, it may be difficult to enjoy a quick, seamless home selling experience.
Real estate agents are available in cities and towns nationwide, and these housing market professionals are happy to assist you in any way possible. If you need a real estate agent who can help you list your house and promote it to dozens of potential buyers, you should have no trouble finding an agent who matches or surpasses your expectations. Or, if you want to find a real estate agent who can offer tips throughout the home selling journey, you can choose from many potential candidates in your area.
Remember, be flexible as you proceed along the home selling journey, and you can increase the likelihood of achieving the best-possible results.
You've spent plenty of time vacationing in warmer weather, so you should be prepared to move from New England to Florida, right? Maybe. But just in case there are things you’ve forgotten, here’s a quick list of moving tips to ease your way into that sunshine state.
- Separate Your Clothes: When you’re packing up, you're entire life to move across the country, a bit of organization is in order. Odds are those winter coats and boots will rarely see the light of day in warmer climates, so ease your way by packing them separately. When you organize your clothes by season during packing, you can ease the move in by pre-allocating certain items for seasonal storage. This arrangement also lets you determine just how prepared you are for yearlong heat, humidity, and rain. Worse than not finding your warm weather clothing is having none at all.
- Bring the Sunscreen: Moving closer to the equator or just into a sunnier climate increases your chance of harmful sun exposure. Examples include anything from minor sunburns to blisters and heat exhaustion depending on your skin type and heat exposure. Be prepared by making sure you get plenty of shade and use correctly applied sunscreen for protection. Invest in hats and umbrellas to broaden your sun protection and slowly increase your exposure from day to day to build up your tan.
- Drink Plenty of Water: Increased heat and humidity lead to increased sweating. Don't worry; everyone will be in the same condition. The only way to replace that vital liquid is to drink plenty of water. Stay away from high caffeine and sugary drinks in lieu of herbal teas and light vegetable waters if you need flavor. Still not satisfied? Try the flavored fizzy water now gracing every shelf. The bubbles don't stop it from hydrating you.
- Remember to Bring a Sweater: This is one of those tips that sounds illogical, but wait. When its eighty plus degrees outside most of the year, everyone has air conditioning, and its always on. That means you're constantly going from ninety to seventy to eighty-five to sixty-five degrees throughout the day. Those drastic temperature drops feel great at first, but after a while, they get quite chilly. It's best always to keep a light sweater, hoodie or wrap nearby to combat that chill. Even better, when you go outside a lightweight jacket or shirt with sleeves can help protect your skin from the sun.
- Keep an ice chest in your vehicle: In many climates, all that’s required to protect your groceries is the shade from your trunk. They might even be safe on your back seat, especially in cold weather. In the heat and humidity, everything changes. Vegetables will wilt, milk will curdle and all during your drive back from the market. If you have to make a second stop, you can lose it all. Most grocery stores in hot climates will hand out free bags of ice with your purchase. Even fast food restaurants often sell bags of ice, so you can stop in and refresh if you have a long drive. Just put the free ice and the groceries into your ice chest and continue with your errands, heat problem solved.
When you’re relocating to a drastically different climate, be sure to check with your real estate agent about different property needs and tips to make your move easier.
The single most difficulty first-time homebuyers face is being able to save up the down payment. From student loans to medical bills; wanting to start a family or live in a more expensive city; coming up with those funds keeps many potential buyers out of the market.
In fact, if you don’t have your down payment saved up yet, you probably don’t think you can buy, but a recent report called the Realtors Confidence Index Survey Report claims that over eighty percent of first-time homebuying transactions take place with less than the common twenty-percent down payment.
Thankfully, there are programs out there just for you. These grants and funds may be just the boost you need.
If you’re interested in living in an area designated as rural, you may qualify for a home loan using a program set up by the Department of Agriculture. The USDA loans help low- and moderate-income buyers purchase homes in rural areas. While a down payment isn’t required, buyers must meet income eligibility requirements. They also must agree to live in the house as their primary residence. Specific addresses apply for these loan guarantees, so if you’re already looking at a rural home, double check the location to see if it qualifies.
National Homebuyers Fund
This non-profit corporation helps potential homebuyers with their down payment grants and closing costs, mortgage credits, energy efficiency financing, and other programs. To take advantage of these programs, the buyer must also qualify for FHA, VA, USDA, or conventional loans and be a low-to-moderate income earner. The program does not require that the buyer be a first-time homeowner so former homeowners who are looking to re-enter the market may qualify. Also, it’s FICO score and debt-to-income ratios are flexible.
HUD Neighbor Next Door
Purchasing a home through this program works to encourage buying in areas selected for renewal or revitalization. It provides funds for teachers, firefighters, law enforcement, and emergency medical technicians to purchase in these neighborhoods. This incentive is substantial, with up to fifty-percent reduction in the list price of an eligible home via a bid-selection process.
If you’re interested in the HUD program and qualify in one of the public servant categories, contact a HUD-registered real estate broker for assistance. Or, contact your neighborhood real estate professional and ask about local programs in your area.