If you work as a freelancer or independent contractor, your income might vary from month to month. Maybe one month you generate $8,000 of income but the next only $4,500. You might be satisfied with your yearly income, but mortgage lenders might balk at the way your earnings fluctuate each month.
Why? Because mortgage lenders want to be certain that you can afford your mortgage payment each month, not just during those in which your income is high. Lenders look for consistent income.
Does this mean that you can’t qualify for a mortgage if your income rises and falls each month? Not at all. You’ll just have to take extra steps to reassure your lender that you won’t miss any mortgage payments.
You’ll need plenty of documents
You can ease your lender’s concerns by providing copies of documents showing that while your income might be higher or lower in certain months, it has remained consistent for several years. This is especially important for contract or freelance workers who don’t hold a full-time, salaried job.
Maybe you work as a freelance photographer. During wedding season, your income soars. But it might be lower during other times of the year. If you can show lenders that your yearly income has remained consistent despite these monthly fluctuations, you’ll increase your odds of qualifying for a mortgage.
You can prove a consistent yearly income by providing your lender with copies of your income tax returns from several years. If lenders can verify that your income has not risen or fallen dramatically on a yearly basis, they’ll be more willing to approve you for a mortgage at a lower interest rate.
You can also provide copies of the 1099 forms that your clients send you at the beginning of each year. These forms show how much you’ve earned throughout the year. If lenders see a steady stream of 1099 work each year, they’ll be less worried about your ability to make your mortgage payments on time.
What else you can do
If you build a high FICO credit score, lenders will be more willing to overlook your fluctuating monthly income. That’s because a high credit score shows that you’ve managed your finances responsibly in the past.
You can build a high score by paying your bills on time and paying down your credit card debt. An exceptionally good FICO score is 740 or higher, while an excellent one is 800 or higher. Keep your score in those ranges and you’ll be far more likely to qualify for a mortgage with a lower interest rate.
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