Freelance and non-traditional employment is becoming more prevalent in today’s world. An estimated 50 million people throughout the U.S. are turning to non-traditional work, whether it’s starting their own businesses, freelancing, or being part of the gig economy (with companies like Uber, Airbnb, etc.). While the freedom to pursue freelance work is wonderful, there can be issues when trying to obtain a mortgage loan. Luckily, non-qualified mortgage loans (non-QM) are a perfect solution for the modern-day worker.
Qualified mortgages (QM) are what we the standard loans we’re used to. Typically, these loans require:
borrowers with a debt-to-income ratio of less than 42%
loan term no greater than 30 years
no risky features: negative amortization, interest-only, or most balloon loans.
Essentially, a non-QM is any loan that doesn’t meet the criteria for a qualified mortgage. Non-traditional workers can often have difficulty showing that they are able to repay a traditional loan. This can be due to multiple income streams, seasonal or inconsistent work, tax deductions, or a number of other reasons. With this in mind, non-traditional workers may be best served by seeking a nonqualified mortgage loan.
Here are some tips to help qualify for a non-QM:
Take the time to organize all of the proof of employment, income, and any other documentation related to your work. This is on top of a solid list of references, past landlords, previous employers, and so on. Keep records that show when, where, and for whom you’ve worked. This will help you convince lenders to provide you with a loan.
On paper, your non-traditional job might look too risky for a mortgage lender. Be prepared to educate him/her on your job. Explain seasonal income peaks and valleys, where and how you find work/clients, and what a normal year should look like in your industry. Show consistency, especially over the last two years with the projection showing that consistency isn’t going to change in the future.
One of the key benefits of non-traditional employment is being able to write off a plethora of items on your taxes. While this certainly helps keep money in your pocket, it can make it look like you don’t have the same ability to pay back your loan. If you are planning to purchase a home in the next couple of years, it may behoove you to forgo some of the deductions in order to increase your reported income. Talk to your mortgage lender to see how much income you need to show to qualify for a loan program and then discuss that number with your tax preparer.
Mortgage and QM lenders are going to require a little more assurance that you’re able to pay back your loan. Before applying for a non-QM, get your debt down as much as you can. This shows that more of your income can go back towards the loan and that you aren’t being spread too thin.
Are you a non-traditional employee who qualified for a non-QM? Share your experience and tips by commenting below.