How to Purchase a Home with Variable Income

Published on October 5, 2020 under How-To

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With the growth of the gig economy, more and more people are making their living in ways that provide variable income. While it's possible to make a decent living from various gigs, from Uber to Poshmark to more traditional freelancing, it's often perceived as not being possible to buy a home.

Thankfully, this is not true; although it's easier to get a mortgage with a regular paycheck, it is absolutely possible for self employed people and gig workers to get a mortgage. Here are some things you need to do:

Document Your Income and Debt Payments

Lenders generally want to see two years of personal and business tax returns. Be aware that they will consider the net, not gross, income of your business. In other words, all of those tax deductions now count against you. Some people may decide to take fewer deductions and a bit of a tax hit so that their income will look better to a bank.

Calculate your base income by taking your total net income for the last two years and dividing it by 24. This is the income you should use to calculate how much of a loan you can afford.

Make sure you document any dips in income. If your income is seasonal, be ready to explain that, for example. You also need to know what your debt to income ratio is. Paying down any consumer debt before buying a house is a good idea; but you should also pay down any business loans to ensure that your debt-to-income ratio is below 43%.

Improve Your Credit Score

If your income is variable, then lenders definitely want to see a good credit score. Ideally, try to get a credit score of 700, although you may be able to get a FHA loan with a score of 640.

Secure a Down Payment

If you've put a lot of money into your business, it can be hard to save up a down payment. One good option for the self-employed if you can find one is a rent-to-own property. If you can afford the slightly higher rent (and like the property), you will have a down payment for purchase at the end of your lease. Unfortunately, if you change your mind, the landlord will pocket the extra money. However, this can give you a home for the two years it takes to build proof of income with some of the money you're spending going towards equity.

You can also borrow against your investment accounts, but remember that you need to repay that money and may lose valuable interest payments.

It's important to be realistic about your down payment, although if you have substantial savings and can put down 20%, you can avoid costly private mortgage insurance. You may be better off putting down 20% on a smaller, cheaper property rather than 10% towards a larger loan.

What Paperwork Will You Need To Fill Out

As already mentioned, you will need two years of tax returns and explanation of income trends. If you have been taking a home office deduction in a rental, explaining that may encourage a lender to consider your net income a little higher.

You will have to sign a Form 4506-T, which will allow the lender to request a copy of your tax returns. This allows them to be confident that you are being honest. It's also a good idea to put together proof of your income, such as 1099 forms, bank statements showing direct deposits, etc. Having a separate business bank account can make this easier.

If you have investment assets, life insurance, savings, etc, bring proof of those too. And if you have been renting, bring documentation from your landlord to prove you have been paying rent on time. This can go a long way.

It is possible to get a mortgage with variable income, but it can be more challenging and you need to be prepared to explain what affects your income and demonstrate the health of your income and that of your business. If you want to discuss your options, you should reach out to a local loan officer who can help you get everything together and work out how much home you can afford.

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