The gig economy is booming. Uber and Lyft each have hundreds of thousands of drivers on their U.S. rosters. Etsy has a thriving marketplace. Platforms such as Guru, Toptal and Upwork let freelancers work for themselves.

“The gig economy has been around for a while,” says Trent Reed, senior vice president, divisional manager with Angel Oak Home Loans. “But when COVID hit, dude, it just blew up.”

Compared to a 9-to-5 job, working as a gig worker or independent contractor offers flexibility. But these self-employed workers can face challenges when they want to qualify for mortgages. The reason? The industry’s mostly automated underwriting processes are geared toward borrowers with steady paychecks who receive annual W-2 statements. Most mortgage lenders impose stricter rules for self-employed borrowers than for those who work for somone else.

While that doesn’t mean gig workers are locked out of financing altogether, it does mean that the hurdles can be a bit higher.

Can gig workers get mortgages?

Yes, but it’s not always easy.

“While getting a mortgage and buying a home without a traditional salaried job seems to be an additional hurdle in an already competitive market, it is possible,” says Robert Heck, vice president of mortgage at Morty, a mortgage brokerage.

The mortgage industry can be reluctant to change, and lenders and major players Fannie Mae and Freddie Mac have been slow to respond to shifts in the labor market.

“The mortgage guidelines have not adapted to this gig economy,” Reed says. “Our guidelines are the same as they were 40 years ago.”

Whether you’re a full-time employee or an independent contractor, the basic criteria to qualify for a mortgage are the same: Lenders look at your credit score, your assets and your income history. Gig workers can face challenges if they’ve been working for themselves for only a short time – less than two years – or make too little money to qualify under standard underwriting rules. No matter how you get paid, mortgage lenders want to see two years of consistent income.

“For non-traditional buyers, the challenge in qualifying for a conventional loan is income inconsistency, which often occurs when someone is transitioning from full-time, salaried employment to contract work,” Heck says. “It could be that they can’t show consistent two-year income or that tax returns and 1099s don’t reflect their total income, making it difficult to clear the debt-to-income thresholds required for conventional loans.”

That tax return issue is a big one. Self-employed taxpayers are wise to take full advantage of the many tax deductions and write-offs allowed by the IRS. However, while piling up the expenses on the tax return lowers the tax bill, the practice can make it tougher to qualify for a mortgage.

Complicating matters is that the rules for self-employed applicants can vary depending on lender or loan type.

Can a side hustle help a W-2 worker qualify for a mortgage?

Say you earn a salary from a full-time job, but your W-2 income isn’t quite enough to qualify for the loan amount you want. If you also have 1099 income, the pay from your side gigs might be enough to move a lender’s no to a yes.

As with everything involving mortgages, there are caveats. A lender won’t take your side gig seriously if you just started last month. But if you’ve been earning a steady, significant income for years, and you have the tax returns to validate the numbers, your 1099 income can help push your qualifying income into an acceptable range.

While gig economy platforms are relatively new, side gigs – teachers cleaning pools during the summer or police officers moonlighting as security guards – have been around as long as the modern mortgage market has existed.

What documents you need

If you’re a gig worker, the loan approval process has similar paperwork requirements to the process for salaried applicants. When applying for a mortgage, expect lenders to request and review the following:

  • Two years of federal income tax returns (personal and business)
  • Recent business bank statements
  • A year-to-date profit-and-loss statement that shows revenues, expenses and net income
  • A copy of your business license
  • A letter from a CPA verifying that you’ve been in business for at least two years
  • Your credit score and credit history, including your three credit reports from Equifax, Experian and TransUnion

If you’ve owned your business for more than five years, business tax returns are not required on loans purchased by Fannie Mae and Freddie Mac.

How to boost your chances of getting approved

You can improve your odds of getting approved for a mortgage as a self-employed borrower by working on (or maintaining) your credit score. Pay bills on time, pay down debt, correct any errors such as incorrect contact information or red flags on your credit reports and stay well below the limits of your revolving credit accounts.

Another way to increase your likelihood of funding is to lower your debt-to-income (DTI) ratio to 43 percent or less. Do this by avoiding any new debt, lowering your existing debt and paying it off more quickly than scheduled, and earning extra money.

Forking over a higher down payment than the minimum required can help, too.

What mortgages do gig workers qualify for?

Self-employed borrowers are eligible for the same mortgage types available to full-time employees. It’s just that qualifying can be a bit tougher.

Conventional loans – those backed by mortgage giants Fannie Mae and Freddie Mac – offer the best combination of low rates and modest costs. However, qualifying can be difficult if you don’t have stellar credit and a strong income history.

Mortgages backed by the Federal Housing Administration and the U.S. Department of Veterans Affairs are available to borrowers with credit scores in the 600s or lower, but they charge higher fees than conventional loans, and VA loans are only available to eligible service members and veterans.

If none of those options work, you can try a non-QM loan, a type of mortgage offered by Angel Oak and other specialty lenders. These loans come with mortgage rates that might be a percentage point or two higher than a conventional loan, but they do allow gig workers to borrow if they can’t qualify for other loan programs.

“Just because someone is an Uber driver and an Instacart driver, it doesn’t mean they shouldn’t be able to get a home,” Reed says.

A subset of non-QM loans is the bank statement mortgage. Lenders who offer this type of loan verify ability to repay by examining the monthly banking documents of a self-employed borrower.

How to land the best mortgage rate

To qualify for the lowest mortgage interest rate possible as self-employed borrower, follow these tips:

  • Polish that credit score. The best deals go to borrowers with scores of 740 or higher.
  • Shop around. By comparing at least three offers, you can save thousands of dollars over the life of the loan.
  • Boost your down payment. Putting down more cash can help your chances of approval.
  • Consider discount points. Points cost more upfront but can lower your rate.

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