What’s Changed Since COVID 19 if You’re Self-Employed or a Freelancer

Independent contractors account for a huge portion of the U.S. economy. According to the Freelancers Union, more than 50 million Americans operated this year as freelancers, which translates into about 35 percent of the country’s workforce. And while freelancing has many perks, getting approved for a mortgage isn’t one of them.

Unfortunately, the ongoing coronavirus pandemic has put additional hurdles in their path when it comes to getting a mortgage. Before COVID-19, the two most important things self-employed borrowers (which includes freelancers, independent contractors, business owners and sole proprietors) typically needed for mortgage applications were two years of tax returns and proof their business was in operation.

You also might have needed an unaudited profit and loss statement for the business, as well as a minimum credit score and maximum debt-to-income ratio. Here’s what has changed, and what to expect when applying for a mortgage as a freelancer in the COVID 19 era.

The need for documentation has increased

This is the main thing that’s changed for freelancers applying for a mortgage. Due to the economic turmoil caused by the pandemic, your lender needs to be extra careful when it comes to determining who actually qualifies for a mortgage and whether the mortgage can be realistically repaid.

That’s why more documentation is now being required for self-employed borrowers, including a year-to-date profit and loss statement, plus business bank statements to support the profit and loss statement. The bottom line: Your lender needs much more proof to show that you’re in a good position to take on a mortgage.

You’ll Have to increase your chances of getting approved

All you used to have to do to increase your chances of getting approved for a mortgage was boost your credit score and improve your debt-to-income ratio. Now, however, freelancers also should be prepared to jump through a few extra administrative hoops to prove their income really is what they say it is.

This includes getting profit and loss statements ready, and maybe even pulling some bank statements to back them up; and while some lenders might allow you to get by with just an audited profit and loss statement, that might not be any easier because it’s a very specific process with a lot of requirements. The result is that it can cost thousands of dollars and take several weeks or months to complete.

That’s why many freelancers (if given the option by their lender) are choosing to prepare unaudited profit and loss statements, as well as bank statements, to prove their income. This can take several hours to complete, so it’s a good idea to have these things ready before you need them.

Note: Be sure to have complete and accurate documentation going back as far as you can, 24 months if possible, to prove that you can consistently afford loan payments. The higher your FICO credit score, and the more robust your income documentation, the higher the chance of loan approval.

The final word

Is it harder for freelancers to get approved for mortgages in the COVID-19 era? The answer is both yes and no. If your business has been consistently doing well and you have the documentation to prove it, you might be just fine. But if you’ve recently hit a slowdown, or are having issues producing the extra proof of income, then obtaining a mortgage could be more difficult than you thought.

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