Self-employed have a tough time landing mortgages, but it’s still possible

For a brief heady period, freelancers and the other self-employed folks found it easy to secure a mortgage: all that borrowers with a reasonably good credit score had to do was write in their income and swear with all the power of their own signature that, indeed, that was what they made. Also known as “stated income” mortgages, they were obviously susceptible to fraudulent borrowers and those whose income was unstable or temporary. By 2008, when the term “liar loans” started appearing in headlines and teaser clips, the boom was over, and for many hopeful borrowers — even the honest ones — so were the chances of owning a home.

The real pity is that when the recession cost so many people their jobs, it also cost them their ability to get a mortgage or refinance an existing one. Many unemployed workers turned to entrepreneurship and launched their own businesses — putting them in the ranks of the self-employed. Yet, many of these new business owners haven’t worked in this capacity long enough to rack up the two years of tax returns for their small business that lenders require. Worse, if they spent significant amounts of money to start up their business — and ended up with a loss on paper, or just a nominal amount of income — they will be evaluated skeptically by even the most small business-friendly of lenders.

But all hope is not lost. Believe it or not, the self-employed and freelancers of the world can still get a mortgage. It will, however, take a little blood, sweat and (possibly) a few tears. A pair of freelancing friends of mine bought a house near my home in 1997, and the process took several months but they’re still ensconced in their sweet little home in a great neighborhood. Here’s what you’ll need to remember:

Can your partner get a W-2?

My friends, Larissa and Martin, are both grant writers in the non-profit world. They had planned for years to start freelancing so Larissa could spend a few days a week working on her art projects. Martin had a few clients already and Larissa was about to quit a job she didn’t much like when they found a great house. Larissa agreed to stay in the job months longer than she would have liked just to secure the loan (she quit the day they closed on the house.) Says Sally Aquire of Moneycrashers, if “there is one steady income that can be relied upon, lenders have greater confidence that you won’t default on your mortgage payments and can look on your self-employed status more favorably.”

Do you have a regular client, or several?

If you’re self-employed, you’ll have to document your income far more carefully than those who get W-2 statements. A few years of tax returns is just the beginning. You’ll also need invoices from clients and even a few letters written by them, assuring your lender that you’re a good person who will likely continue to be paid for your great work. If you have one or two that have paid you monthly or quarterly, and you can demonstrate a relatively steady stream of cash coming from them, your lender will be more likely to approve a loan. When I worked for a company that employed a large number of freelancers, I provided several letters indicating that an individual had been paid monthly for years, and as far as I was concerned would continue to receive those payments. The reliable freelancers got the loans, financial meltdown be damned.

If you don’t have regular clients but can demonstrate your regular income with a variety of clients — using tax forms and profit and loss statements — you may still have a chance. If you don’t have a knack for balance sheets, get a good bookkeeper to prepare some for you; the investment will be worthwhile.

Good credit is a must.

A credit score that is lower than 700 will make it extremely hard for you to get a mortgage as a self-employed individual. If your credit is much lower than that, you may as well just get a great apartment and work on improving your credit.

A track record of bank-approved success is required.

If you’ve managed to slide most of your family’s expenses into your business — I’m a food writer, for instance, so I have put most of the cost of groceries and kitchen implements into my self-employment expense column — that’s probably not going to work for a lender. One WalletPop writer tells me that she’s been described as “unmortgageable” because her income just isn’t provable for the banks, despite that fact that she makes enough to carry mortgages on two homes and has a great credit score.

Another writer’s son, a musician, wasn’t even able to secure a $40,000 FHA loan. “The rules are the rules,” she says, mourning that she couldn’t co-sign for him. If a mortgage is really important to you, holding down a job for a few months (even if you hate it) is probably the best way to go. Failing to list things you’ve considered expenses for a few years — and paying lots of taxes as a result — is an expensive route to the American Dream.

Save up a big deposit.

Without a W-2, lenders typically look for at least 20% down. You may need even more if you haven’t been making more than $50,000 to $60,000 in gross income a year. It doesn’t seem fair, but you can comfort yourself in the knowledge that you’ll probably never end up with an underwater mortgage.

Getting a loan as a freelancer is definitely not easy. But once you’ve signed the documents, you can do as you like. And as long as you pay each month, your lender no longer will have you under the magnifying glass. As they say, nothing worth doing is easy, and it goes double for a pretty house in a neighborhood you love — one that you can afford, and have the life you want, too.