Divorcing While on a Freelance Income? Can You Qualify for a New Mortgage?

Here’s what you need to know about qualifying for your next house:

If you’re a self-employed freelancer, the rules just became a little tougher for you to qualify for a mortgage loan. Even if you’re pulling down a cool six figures—which many freelancers are—it may still be harder to get a loan than if you were steadily employed at a regular job, especially if you’ve mastered the art of maximizing your tax deductions. Those deductions are great for reducing your tax liability, but they also reduce your taxable income, which is the figure most lenders use to determine your ability to repay.

And now that COVID-19 has changed the landscape of lending, the path to homeownership includes even more hurdles. On top of the closer scrutiny self-employed borrowers face when applying for a loan, Fannie Mae has recently required two additional documents to qualify: an audited year-to-date P&L and two months of deposit account statements that support the income listed on the P&L.

“Income from a business that has been negatively impacted by changing conditions is not necessarily ineligible for use in qualifying the borrower,” says Fannie Mae. “However, the lender is required to determine if the borrower’s income is stable and has a reasonable expectation of continuance.”

You can see the actual underwriting and documentation rules lenders must follow here.

Here’s what else you need to know

You’ll need to have a strong credit score. Fannie Mae’s minimum credit score for qualifying is 620, except in the case of an ARM, where the minimum score is 640.

Your minimum down payment will probably be 20%, but you might consider putting down more—at least 30%—because a larger down payment shows you’re serious and reduces your loan amount, thereby reducing the lender’s liability.

You must have a strong debt-to-income ratio. To most lenders, a DTI below 43% is usually sufficient, but remember, lenders calculate your gross income, not your net. So, all those juicy tax deductions? They could be hurting you here.

Since proof of income can be difficult to produce—and you likely won’t be providing a W2 to prove your income—you’ll need to accumulate at least two years of tax returns, an audited P&L statement and, during COVID-19, a letter from your accountant confirming that your income is not significantly reduced by the pandemic.

Basically, you’ll need to prove that your income is steady enough to repay the loan. Fannie Mae measures your success factors on these criteria:

• Income stability: your income must be “stable and continuous”
• The location and nature of your business
• Demand for your products or services
• The financial strength of your business
• Your ability to continue generating the same level of income through the pandemic
• Your length of self-employment. Fannie Mae typically likes to see two years, but it can be shorter if your self-employed/freelance business is significantly similar to the career you held before going freelance.
• Verification of income: typically, two years of tax returns

If you’re using your business assets to help you qualify, the lender will perform a cash flow analysis to confirm that your withdrawal of the assets won’t have a negative impact on your business.

So, there’s a lot to consider when planning to divorce while freelancing, especially during a pandemic.

Enlisting the help of a Certified Divorce Real Estate Expert will help. A CDRE can introduce you to a great Certified Divorce Lending Expert, and help you get the most money from your current house so that you’ll step out of your divorce better prepared to step into the next stage of your life.

650-550-8646

Shannon Rose
CDRE, SRES, CDPE, CLHMS, GPS
DRE# 01422955
Los Gatos, CA
1-650-550-8646
DivorceRealtor@RoseGroupRE.com