My house has been on the market for nearly five months. Someone could walk in here tomorrow and buy it, and we could be closing the sale in 30 days… well, in theory, at least. But although our plan is to buy a new house one this one sells, I’ve got a dirty little secret: I’ve put off our mortgage qualification.
Now Hear Me Out
I’m not being lazy. In fact, I was simply being smart – at least, that’s what I was telling myself. The week our house went on the market, one of my freelance contractors approached me about working full-time. The process, she told me, might take a while: as long as three months. Since we weren’t getting all that much interest in our home, I didn’t see the point in rushing the mortgage qualification process, especially if our financial picture would be dramatically changing in the near future.
Unfortunately (or maybe not unfortunately – I haven’t decided that yet), the full-time gig fell through. My reason for postponing our home loan application suddenly went out the window… until I came up with another excuse reason.
Delaying The Inevitable: Part 2
You might have thought that once I learned I wouldn’t be moving from freelance to full-time employment that I would have moved ahead with the mortgage qualification. After all, I’m not a procrastinator at heart. But I still held back.
Why?
Most lenders base the qualification process for self-employed individuals – including freelance workers like myself – on two years’ income. It’s really silly when you think about it; I could have proved the stability of my income from that brand new job by simply showing two pay stubs. Yet, in order to qualify for a home loan as a freelancer, I need to show a lender that I’ve been bringing in a reliable income for two solid years, at which point the lender will average out my income based on those 24 months (in other words, even if you’re trending higher and higher as the months go by, you won’t be credited for that).
That’s not to say that some lenders don’t deviate from the two-years’ income rule for the self-employed. Some banks, including online lenders like AimLoan, may only require you to show one year’s worth of income; other lenders, like a bank in my area, wants to see three years’. However, those one- and three-year income requirements tend to be the exception, not the rule.
This month marks my second anniversary as a freelance writer and researcher. So maybe you’d think I’m plotting my impending run on the bank to finally apply for that home loan?
Yeah, that’s not happening.
Holding Pattern
I actually contacted a mortgage broker about a month ago to discuss our home loan options. The fact is, I’m getting antsy about the mortgage qualification that I’ve put off for nearly five months now. When I told him I was self-employed in freelance work, he asked me – as I knew he would – how long I’d been in this line of work.
“Two years next month,” I told him proudly, thinking we’d finally be able to get the show on the road.
“Hmmmmm,” he replied, pausing. I knew the pause wasn’t a good sign.
As it turns out, when lenders say they want to see two years’ of verifiable income, they’re looking for income that’s been verified by the IRS. They don’t want to see two years of paychecks or receive a letter from the HR department of your contractors. They want to see two years’ worth of tax returns. And since I started freelancing mid-year, I don’t have two calendar years worth of tax returns until I file my 2012 returns next winter. And, unfortunately, this is pretty standard across the board as stated-income loans all but disappeared after the mortgage meltdown.
In other words, I won’t get full credit for my freelance earnings in the mortgage qualification process until February 2013.
My Brain On Overdrive
Our mortgage broker told us he could qualify us for a mortgage based on our 2010 and 2011 tax returns, which would only factor in 18 months of freelance income instead of a full 24. If we did that, we’d still qualify for the half a dozen or so dream homes that are on our list, although it might affect our interest rate in a negative fashion.
Our house still has yet to field any offers, which is giving me the false illusion that I can afford to bide my time securing a home loan for our next house. However, I know that could change overnight.
What would you do if you were me? Would you apply for a home loan knowing that the lender would only be seeing an incomplete view of your finances? Or would you hold off another 6-8 months until the full picture was available?
{ 6 comments… read them below or add one }
I knew about the 2 tax returns as well. That is better then it was 5 years ago though. Prior to that when you told a broker you were self employed they would often not even want to try to get you a mortgage. Things have changed.
In terms of applying for a mortgage now, my question is if you qualify for a specific amount at a specific interest rate, how long do they guarantee that rate for? 6 months? a year? And if you are not able to buy for a while and during that time your income criteria gets better or you have your 2nd tax return ready, can you re-apply for more money and a better interest rate?
This is good information to know. Even though I’m just starting out, I do freelance work and plan to continue with this. Down the road I will eventually want to buy a house. Thanks for the info!
Chase
Do you really want to borrow MORE money? You could borrow less (and have a more limited amount of dream homes to buy) or borrow more and be indebted for longer.
I see where you are coming from, though. Last year, when we went to go buy a house, we didn’t end up buying because we wanted to borrow more and the boy is self employed, so we had to wait another year.
I have never had to qualify for a mortgage as a self-employed person…but have you considered going ahead and applying to lock in these low interest rates? They are at record lows….you may be able to lock in for a certain amount of time!
Holly, the “upper threshold” for locking in rates – at least, the really good rates you’d want to lock in – seems to be 45-60 days, which seems like a long time… until I realized that I’d have had to apply three different times since listing my house! Pulling up my credit report that often could negatively impact my credit score, and kind of feels like a lose/lose, you know?
It certainly sounds like an interesting situation you have here. I hope things work out for you and you get your dream house. Good luck.