Homebuyers

Freelancers, Gig Workers, and Business Owners Are Buying Homes with These Mortgages

Homeownership doesn’t have to be a pipe dream for the self-employed, the small business owner, or the gig worker.

While most mortgages are geared towards buyers with the kind of traditional employment that comes with W-2 forms, there are plenty of mortgages for those with more unconventional ways of paying the bills.

Most of these loans are considered Non-Qualifying Mortgages, aka non-QM loans. These mortgages typically offer more flexible ways to verify a buyer’s income to make it easier for self-employed individuals to qualify for loans.

Another key feature is they are not backed by the federal government.

“[If your] taxable income qualifies, it's the same as someone with a salary or hourly [income,]” said Larry Steinway, a Skokie, Ill.-based regional sales manager at New American Funding.

So, whether you’re a long-time entrepreneur or a newer-to-the-field freelancer, it might not be as hard to buy a home as you think.

These are the non-QM financing options you need to know about.

Bank statement mortgage

Bank statement loans are best for self-employed individuals who don’t receive traditional, regular paychecks. So, lenders use bank statements instead to verify their income and assets’.

These loans are also helpful for people who take larger-than-normal deductions on their taxes. This can affect their on-paper income, reducing the size of a more traditional loan they may be approved to receive.

“[Bank statement loans] take the deposits into your business and averages those deposits to calculate your income,” said Steinway.

1099 mortgage

These loans are best for freelancers, independent contractors, and gig workers, or anyone else that receives 1099 income. This kind of non-QM loan uses 1099s and bank statements to verify income, rather than tax returns and W-2s.

You’ll need to have at least one to two years of 1099 income to qualify for this loan, along with a higher credit score and down payment.

However, 1099 loans may have higher mortgage interest rates than Conventional loans. They are also often harder to find.  

Profit & loss (P&L) mortgage

Profit & loss loans are similar to 1099 and bank statement loans—they’re made for buyers with unconventional incomes. They use alternative documentation to verify income, such as profit and loss statements.

Potential buyers must provide a profit & loss statement, prepared by a certified public accountant, that proves their income is adequate for the loan amount they’re seeking.

They’re a popular pick for limited liability corporations (LLCs), S Corporations (S-corps), and other small business owners.

However, like many other non-QM loans, P&L loans can be harder to secure due to their more stringent credit requirements. Many lenders also do not offer them.  

Asset depletion mortgage

Buyers who plan on paying off a mortgage with their assets, rather than their income, may qualify for an asset depletion home loan.

Asset depletion loans are a type of non-QM loan aimed at buyers with unconventional incomes, retirees, or high-net-worth individuals.

However, these types of loans have lofty requirements.

Buyers must have high credit scores, verifiable assets, often of at least $500,000, and little debt.  

Additionally, home equity typically isn’t a qualifying asset for these loans as any equity must be liquid and easily accessible. That means you can’t use your existing home as an asset to qualify for a loan to purchase another property.

Debt service coverage ratio (DSCR) loans

DSCR loans allow potential buyers to qualify based upon the projected income of their business, rather than their personal income.

As they’re a type of business loan, they’re often used by real estate investors to purchase rental properties. They generally can’t be used to purchase a primary residence.

This type of loan compares a property’s potential annual rental income to its debt obligations (such as its mortgage, insurance, and taxes) to make sure that a home will generate more than enough income to cover what the owners owe on their loans.

Larry Steinway NMLS # 223579