Catherine Cuddy's Blog
The gig economy has exploded over the past decade. Today, around 36% of the US workforce is freelancing and many more or self-employed small business owners.
While being your own boss does afford you great freedom to set your hours and often work where you want, you may face extra scrutiny when trying to get financing to buy a home.
Because your income comes from many sources and you may do your own bookkeeping, it's more challenging to prove your income. But fear not. Freelancers can get financing. You just need to be prepared.
Note that every lending institution may be a little different. But here's your quick guide for home financing for freelancers and other self-employed professionals.
1. You may need to work at freelance a little longer
If you just left a nine to five and started freelancing six months ago, you do not yet have the track record of consistent income that a loan officer will be able to see. The loan officer needs to know that you have the money coming in to pay this loan.
In most cases, loan officers like to see applicants who've been successfully freelancing for at least two years.
2. Clean up your bookkeeping
Are you the kind of person who pulls out a box of receipts on April 14th and then scrambles for the next 18 hours trying to account for last year? You may struggle with a loan officer. They need to see well-organized records of incoming and outgoing, just like any business.
You don't have to take an accounting course. But anyone should be able to follow behind your numbers on a spreadsheet to see exactly how you reached the figures that went on your tax return.
3. Get a CPA signature
You may need to get the signature of a Certified Public Accountant (CPA) on your books for at least the last six months. But please don't do this before they ask for it because it will cost money. The more disorganized your financial records, the more it may cost.
If you'd be embarrassed to show your bookkeeping to a CPA, please see the tip immediately above. You can do this.
4. Make your case
If your income fluctuates wildly or has dropped in the most recent year, that may be a red flag for a loan officer. Even if they don't ask about it, make sure they know why that dip occurred.
Perhaps you were taking care of an aging parent or a sick child. Some of your income may have been delayed for some reason. Be prepare to explain the ebb and flow of your income.
Don't appear to be a victim of circumstance. But do communicate irregularities that don't reflect the success you're experiencing as a freelancer.
5. Have a strong savings
Freelancers' income varies from month to month, but your mortgage payment does not. Show that you're stable and have a backup plan. These savings should be in addition to a down payment.
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For years home ownership has been the American dream, but, according to the Pew Research Center, a higher percentage of us are renters than at any other time in the last 50 years. Is that a bad thing? Not necessarily. For many people renting may be the right choice. Every individual and family needs to consider all the factors and make the decision that’s right for them.
The Financial Consideration
There’s a rule of thumb called the price to rent ratio. You get it by dividing the price of a house by the annual rent. For example, if you can buy a house for $300,000 or rent it for $1500 per month, the ratio is 300,000 / (12 * 1500), or 16.7. When the number is 15 or less, buying is the better choice, when it’s 16 to 20, renting becomes more favorable and when it’s over 20 renting is significantly better. However, this fails to take in factors like down payment amount, financing terms, taxes, insurance and other costs, which can vary widely. A more accurate number, telling you how long it will take to cover the up-front costs of ownership and pull even financially with renting, can be found using one of many calculators available.
The Other Considerations
While this sort of calculation is valuable, there are other questions, both financial and lifestyle-related, that the potential renter or buyer must ask.
What can I spend upfront for down payment and closing costs?
Can I afford a major repair such as replacing a furnace or air conditioner? There are insurance-like plans to defray some of that cost, but those make up another annual expense.
How long do I plan to stay? Selling a home and buying a new one is costly and time-consuming.
Which is more important to me, stability or flexibility?
Advantages of Home Ownership
As the inheritor of the American dream, the homeowner has some opportunities and privileges that the renter can’t enjoy.
Appreciation and equity. As home value rises and morgage balance drops, homeowners gain equity, which for many is their most valuable asset.
Freedom to remodel. There’s no landlord telling you what you can and can’t do with your property.
Stable monthly payments. Taxes and insurance can increase, but principal and interest payment remains the same. If you stay there long enough, eventually you’ll have no principal/interest to pay at all.
Tax advantage. For most people, it isn’t what it was before the 2017 tax changes, but interest and taxes may still be deductible.
Stability. You can become a member of your neighborhood and your children can stay in the same school system. No landlord can decide to sell and give you notice.
Advantages of Renting
No large upfront expenses.
Your landlord is responsible for major repairs.
Still some opportunity to build credit by paying rent promptly.
You have less at risk. You won’t be affected if property values fall.
Flexibility. If you choose to move you can easily give notice and do so.
Here’s one last question: which feels better, the satisfaction of owning your own castle or the freedom to change your life quickly? The answer may go a long way toward pointing you in the right direction.
If you've heard people talk about "subject-to" real estate, you might be curious what that means and if it would be a good investment for you. Briefly, "subject-to" real estate means you're buying the property but the loan on that property stays in the name of the existing seller. You're making your purchase "subject-to" the existing mortgage or lien.
Why Would Someone Buy Real Estate This Way?
When you buy a "subject-to" property, you don't have to get a mortgage in your own name. That can be perfect for people who don't want to tie up their credit or funds. It also works well for those who might not be able to qualify for an existing mortgage. Since you're not putting your name on anything that involves the mortgage, you're free and clear from that standpoint. But you'll own the house, and you'll make the mortgage payments.
Is This a Good Wealth-Building Tool?
This can be a great tool to build wealth when it's used correctly. It's very important that you continue making the seller's mortgage payments on time, and that you get everything in writing. But since you don't have to qualify for a mortgage yourself, you can choose great properties that people really want to sell. Often, this is because the owner is in foreclosure. By buying the property "subject-to", the owner doesn't have to go through foreclosure proceedings and have that on their credit report.
How Much Risk is Involved in This?
As with any type of investment, there is always risk. The biggest concern is that the seller of the property will file for bankruptcy. When that happens, the house could be included in that filing and would be foreclosed upon by the lender. You could lose your investment, since you aren't the one who has the property's mortgage in your name. Another risk is the due-on-sale clause in the seller's mortgage. Almost all mortgages have these, but they're often not enforced. Still, if the lender wanted to enforce that clause, they could demand that the entire mortgage be paid if the deed transfers into your name.
How Many "Subject-to" Properties Can Someone Own?
Theoretically, there's no limit to the number of "subject-to" properties that you could own. As long as you can make the payments, you can keep buying these properties. You don't need any credit to get started, and you won't really need much cash, either. You'll simply have to be willing to take a little bit of risk to build up your real estate portfolio. With that in mind, though, it's not a bad idea to have an attorney help you, at least right at first, to be sure you're protecting yourself and the seller as much as possible.
When you purchase real estate, you must put down a good faith deposit. Several factors determine how much you will need to put down, but it could be as little as $100. In order to have a valid contract, the contract must have “consideration,” or something of value exchanged for the contract. The good faith money also shows a seller that you are serious about purchasing the property.
Who Holds the Good Faith Money?
You usually give the good faith money to your real estate agent. The agent puts the money into an escrow account. If you are buying a newly built home, you might give the good faith money to the builder. However, if you are working with a real estate agent to buy a newly built home, in most cases, it’s better to give the deposit to the real estate agent.
Is Good Faith Money Refundable?
In most cases, your good faith money is not refundable. This ensures that you are serious about buying the property and not just “tire kicking.” However, a real estate purchase contract has several exceptions. In addition to the exceptions that might be in the contract, you can add your own as long as the seller agrees. The most common exceptions are your ability to get financing and that the seller did not misrepresent the condition of the home. As long as you can meet an exception, your money is refundable.
How Much Is a Good Faith Deposit?
Most sellers like to see at least $1,000 down. However, a seller might require a percentage of the selling price. Whichever amount the seller wants, it must be stated in the purchase agreement. If you want to change the amount of the good faith money, the seller has to agree to it or you won’t have a contract.
What Happens to My Good Faith Deposit?
Once you close, the real estate agent forwards the money to the seller as part of your down payment. The amount is shown on your closing documents and is subtracted from the final agreed-upon selling price of the home. For example, you buy a house that is $250,000 and you put down $5,000 as good faith money. Your lender requires 20 percent down, so you give the lender $50,000 at closing. Your documents will show that you paid a total of $55,000, so your loan will be $195,000 plus closing costs.
The closing costs could be subtracted from your down payment, the good faith deposit or added back into the loan, depending on what you and your lender agree to. Regardless, the amount of your down payment is $55,000, even if some of it is used for closing costs.
If you have any questions about how your real estate agent handles your good faith deposit, be sure to ask. You should always ask about exceptions to ensure you can get your money back if the loan does not go through or if the house was misrepresented by the seller and/or their agent.
Your thirties are a time of many important financial decisions. Many people are starting families, buying homes, and getting settled into their careers by the time they turn thirty. The following ten years are often marked by salary increases, moving into larger homes, and saving for retirement.
It’s vital to have a solid grasp on personal finance in your thirties, as it is in many ways the foundation of your finances for the decades to come. So, in this article we’re going to give you some advice on buying a home and managing your money in your thirties.
Straighten out your credit
If your twenties were a volatile time of incurring debts from student loans, car loans, and other expenses, then it’s paramount to get your credit in order in your early thirties. Having a high credit score can secure you lower interest rates on a home loan or let you refinance your loans at lower rates.
Start by making sure your bills are on auto-pay, and be sure to settle any older debts from your younger years. You can also use a credit card for recurring expenses, such as gas to get to work or groceries, and then pay them off in full each month. This way, you’ll build credit and avoid accruing interest at the same time.
Reevaluate your lifestyle and long term goals
A lot can change from the time you turn 25 to the time you turn 35. Your goals might shift from finding a home near the ocean to finding a home near a good school district for your children. You might also have the shocking realization that your children will be heading to college sooner than it might seem, and that you’re still working on paying off your own student debt.
Consider things like the size house you’ll need for your family, where you want to live and whether that involves being close to aging parents, and reallocating money depending on your retirement goals.
Rethink your insurance coverage
Gone are the days when all you needed was a car insurance policy to get by. As you age and your responsibilities grow, you’ll need to think about the future for you and your family. That may include a more comprehensive health insurance plan for your family, a life insurance policy for yourself, or increased covered for home and auto insurance.
Automate the headaches away
With all of these growing responsibilities, it can be easy to get frustrated with the time you’re losing to keeping your finance in order. Fortunately, there are many tools at your disposal in the internet age that will make all of those responsibilities an afterthought.
First, get a budget planning app, like Mint or You Need a Budget (YNAB). Next, set up your bills to auto-pay if you haven’t yet. Then, put reminders in your phone to periodically check your credit score and reassess whether you need to pay for certain monthly services (do you still watch Hulu?). Finally, if you haven’t yet, make sure you have your paychecks direct deposited into the accounts you’d like them to enter so you don’t have to worry about them.