Matthew Walsh's Blog
The gig economy has exploded over the past decade. Today, around 36% of the US workforce is freelancing and many more or self-employed small business owners.
While being your own boss does afford you great freedom to set your hours and often work where you want, you may face extra scrutiny when trying to get financing to buy a home.
Because your income comes from many sources and you may do your own bookkeeping, it's more challenging to prove your income. But fear not. Freelancers can get financing. You just need to be prepared.
Note that every lending institution may be a little different. But here's your quick guide for home financing for freelancers and other self-employed professionals.
1. You may need to work at freelance a little longer
If you just left a nine to five and started freelancing six months ago, you do not yet have the track record of consistent income that a loan officer will be able to see. The loan officer needs to know that you have the money coming in to pay this loan.
In most cases, loan officers like to see applicants who've been successfully freelancing for at least two years.
2. Clean up your bookkeeping
Are you the kind of person who pulls out a box of receipts on April 14th and then scrambles for the next 18 hours trying to account for last year? You may struggle with a loan officer. They need to see well-organized records of incoming and outgoing, just like any business.
You don't have to take an accounting course. But anyone should be able to follow behind your numbers on a spreadsheet to see exactly how you reached the figures that went on your tax return.
3. Get a CPA signature
You may need to get the signature of a Certified Public Accountant (CPA) on your books for at least the last six months. But please don't do this before they ask for it because it will cost money. The more disorganized your financial records, the more it may cost.
If you'd be embarrassed to show your bookkeeping to a CPA, please see the tip immediately above. You can do this.
4. Make your case
If your income fluctuates wildly or has dropped in the most recent year, that may be a red flag for a loan officer. Even if they don't ask about it, make sure they know why that dip occurred.
Perhaps you were taking care of an aging parent or a sick child. Some of your income may have been delayed for some reason. Be prepare to explain the ebb and flow of your income.
Don't appear to be a victim of circumstance. But do communicate irregularities that don't reflect the success you're experiencing as a freelancer.
5. Have a strong savings
Freelancers' income varies from month to month, but your mortgage payment does not. Show that you're stable and have a backup plan. These savings should be in addition to a down payment.
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Of course, you want to stay within your budget when buying a house. You certainly want value for your dollar. But a buyer should never lose sight of the fact what they truly desire is getting the home they want and that fits their needs. To that end, potential buyers may put in a “low-ball” offer on a house they truly want. They may risk losing a home that meets all of their qualifications by placing an offer that is five or ten thousand dollars less than a price the seller is willing to accept. What can be even more frustrating is that even if a buyer's offer is accepted by a seller, the buyer may just waste that money, or more, on the mortgage they acquire.
Buyers may be surprised to learn how much even a half of one-percent difference in a mortgage rate can make.
In our first example, after a down payment, a buyer gets a mortgage for $250,000 over 30 years at 4.5% interest. The monthly payment would be about $1,267 monthly. Over the course of 30 years, those payments would total $456,120. The net cost of the loan is $206,120.
In our second example, we take that same $250,000 mortgage over 30 years, but the buyer compared mortgage rates and was able to find a lender offering that same loan at 4.0% interest, one-half of one-percent less. The monthly payment would now be $1,194, totaling $429,840. The net cost of this loan is $179,840. The difference between the two loans is $26,280. All because of a .5% interest rate difference.
The Best Way to Save Money on a Home
Rather than chancing to lose a home you really like by making an offer that is too low, consider instead performing due diligence on mortgage rates. Seeking out a lower rate can be critical in saving you five, ten or twenty thousand dollars or more. That's a far better solution than losing a home you really wanted.
There are a lot of factors that go into determining loan rates for mortgages. These include the buyer's credit rating, work history, income to debt ratio and loan to value ratio. The bottom line is the better your credit the more options you will have in securing a mortgage loan.
One of the best ways to save money on buying a home is saving money on your mortgage rates. The best way to do that is by monitoring your credit rating and working to build it. When it comes time to buy a home, get pre-qualified and compare mortgage rates. You can even use an online calculator to compare rates on your own. Need further assistance in determining how to find the right mortgage for you? Feel free to reach out, and we can embark on your mortgage and home journey together.
Looking to buy your first home? Unless you have a couple hundred thousand in the bank, a rich family member or a winning lottery ticket, you’re going to have to borrow money. TV ads suggest it’s as easy as clicking your phone, and in some cases it might be, but you should know what kind of financing is available and the advantages and disadvantages of each.
In this option you go to a bank or other mortgage lender, they give you money and you buy your house. It’s straightforward and offers the lowest interest rates. It’s also the hardest to qualify for. That’s because there’s no government agency guaranteeing to step in if you default. If you don’t pay, the bank is on their own in repossessing the property and recovering what they can.
Do I qualify for a conventional mortgage?
Whether you qualify, and what rate you’re eligible for, depend largely on three factors.
Your FICO credit score.
Your Debt-Service Coverage Ratio (DSCR). A measure of your ability to pay: monthly income divided by the mortgage costs.
The Loan-to-Value ratio (LTV). The loan amount divided by the cost of the house. For the most favorable terms this can be no more than 80 percent, which means a 20 percent down payment. If you don’t put 20 percent down, there are other options.
Private Mortgage Insurance (PMI)
Some lenders write conventional mortgages with as little as 5 percent down, but you’ll have to buy PMI. This covers part of the bank’s loss if you default. The premium depends on the three factors mentioned above. It can add up to hundreds to your monthly payment. You’ll never see that money again, but you get your foot in the housing door and enjoy any appreciation that takes place. As your principle goes down and LTV drops under 80 percent, you stop paying those premiums.
Sometimes you can use a second mortgage for some of the down payment. A common variation is the 80-10-10, where you put 10 percent down and borrow 80 and 10 percent on the first and second mortgage, respectively. The rate for the second mortgage will be higher but the overall monthly payment might be lower than with PMI.
FHA and VA mortgages. With these a government agency guarantees the loan. FHA’s can have a down payment as low as 3.5 percent, and VA’s (available to veterans) might have no down payment at all. Interest rates are higher than conventional mortgages.
Floating Rate Mortgages
Most mortgages have an interest rate fixed for the life of the loan. With floating rates, there is an introductory period of a few years with a rate lower than a fixed rate mortgage. After that, the rate varies at a predetermined percentage above the prime rate. This can get you into a home with a low initial monthly payment, and is designed for people who expect their income to increase significantly before the higher rate sets in.
Down Payment Assistance
A federal program, the Freddie Mac Home Possible Advantage, offers 97 percent loan and down payment assistance to low and moderate income buyers. Also, you can contact your state’s Department of Housing and Urban Development (HUD) to see what assistance is available at the state and local level.
A pre-constructed condominium is an excellent way of getting a new space at a decent price. One of the advantages of getting a pre-constructed condominium is that it can be customized to match your style. Here are the things you be aware of when buying a pre-constructed condo:
1. Many pre-construction condominiums get delayed. Understand that many condo projects are not always ready at the expected time provided by the developers. Therefore, you should plan to move in six months later than the proposed move-in date.
2. Expect to put up to 20 percent down. You may buy a resale condo with as little as 5 percent down payment. But, such is not the case for pre-construction condominiums. The standard is about 15 to 20% down payment except in a few instances.
3. You will have to pay HST. Newly built condos are subject to HST, unlike resale condos. It is worth noting that your purchase may qualify for the New Housing Rebate Program of the GST/HST
4. New-build condo may attract additional closing cost. Your purchase price can be increased by 1 to 3 percent through expenses like utility connection fee, HST on new appliances, as well as builder/developer adjustment charges.
5. You may be a tenant sooner than you planned. You should also be aware that your condominium may be ready for moving in before the building project completes. In that case, the building cannot be set up as a condo corporation. Instead, you can rent the unit from a developer instead of owning it.
6. Your condo fee may rise. Condo developers attract prospective buyers with reduced monthly maintenance fees. The fees will increase after two or three years of staying in your home. These condo fees can increase significantly, so you must keep that in mind during your budget planning.
7. Lock in your mortgage rate beforehand. Developers usually work with their preferred mortgage providers. If you are in this circumstance, you will have the opportunity to lock in at current low-interest rates. This low-interest rate will come into play as soon as you close on your condominium.
8. The building may not look exactly like what you saw in the video or showroom. Developers have the right to adjust their plans. The indoor-outdoor may not be what you saw in the video as some features may be optional or at additional costs.
Speak to your real estate agent today about your condo deal to know what to expect before starting.
Preparing to buy a home is a long and stressful process for many. You’ve spent months, or even years, saving for a down payment, planning your future, and building your credit to ensure you get the best possible interest rate on your loan.
Then you find out, when getting preapproved for a mortgage, that your credit score dropped by a few points. So, what gives?
There’s a lot to understand about how credit scores affect mortgages and vice versa. In today’s post, I’m going to attempt to cover everything you need to know about how applying for a mortgage can affect your credit score so you’ll be prepared when it comes time to buy a home.
Prequalification, preapproval, and credit checks
There are a lot of misconceptions about what it means to be preapproved or prequalified for a loan. Some of it is due to the jargon that is used in real estate transactions, and some of it is just a marketing technique on the part of lenders.
So, what does it mean to be prequalified and preapproved?
The short version is that getting prequalified is a quick and easy process to determine whether you’re eligible to lend to and how much you’re likely to receive. It involves a quick review of your finances, and often includes either a self-reported or soft credit inquiry.
A “soft inquiry” is the type of credit check that employers typically use for a background check. It doesn’t affect your credit score, as you are not applying to open a new line of credit. In fact, many lenders’ process for prequalification is a simple online form that doesn’t even require a credit check. We’ll talk more about the difference between soft inquiries and hard inquiries later.
The simplicity of prequalification makes it a simple and easy way to get started. But, it isn’t always accurate in how well it predicts the type of mortgage and loan amount you can receive. That’s where preapproval comes in.
When you get preapproved for a loan you fill out an official application (you often have to pay for these). This will request documentation for your finances and assets, and will ask your approval to run a detailed credit report.
These credit reports are considered “hard inquiries” and are a vital step in getting approved or preapproved for a mortgage. However, they also, at least temporarily, lower your credit score.
Why hard inquiries lower your credit score
When any creditor, be it a bank or credit card company, is determining whether to lend to you, they want to know that you are a safe investment. To determine this, they want to know how frequently you pay your bills on time, how much you owe to other creditors, and how financially stable you are right now.
When you make multiple inquiries in a short period of time, it’s a red flag to lenders that you might be in trouble financially. Thus, hard inquiries will lower your credit score for 1 to 2 months.
Applying to multiple lenders: the silver lining
When borrowers apply for a mortgage, they often shop around and apply to multiple lenders. While it may seem that all of these hard inquiries will add up and drastically lower their credit score, this isn’t the case.
Credit bureaus take into account the source of the inquiries. If they realize that you are applying for mortgages, they will typically recognize this as rate shopping and group these applications together on your credit report, counting them only as a single inquiry. This means your score shouldn’t drop multiple times for multiple mortgage preapprovals that were made within a small time frame.
Now that you know more about how mortgage applications affect your credit score, you can confidently shop around for the best mortgage for you and your family.