The following was submitted by a guest contributor
Freelancers know what they want and they aren’t afraid of risks. They have quit their nine to five to become their own boss, embracing the new challenge and all of the curveballs thrown into the mix.
But the transition from employed to self-employed can raise some red flags for lenders and most freelancers find that securing credit of any kind, whether it’s obtaining a mortgage or simply looking at a credit card comparison, is much trickier than before.
Options are Available
Being a member of a credit union or holding an account with a bank for three or more years looks good to those particular financial institutions that could extend you a loan. Check with your bank or credit union first for lines of credit, personal loans, auto loans and even mortgages.
No matter where you apply for credit, it’s important that a freelancer can prove their income. This is usually done with tax forms, although there’s a catch. Many freelancers may be tempted to claim fewer earnings on their taxes in order to pay fewer taxes, but the actual earnings for the year are not reported.
This means that the claimed income is a much lower amount, so getting approved for a loan becomes more difficult. Make sure that the amount of taxes claimed each year is accurate and not reflecting a lower salary.
A self-certified mortgage may be an option, although these are becoming harder to come by. This is a type of mortgage that doesn’t require the applicant, such as a self-employed applicant, to prove earnings.
You simply inform the lender of your income. The reason these are quickly disappearing is because people would often lie to get more money, so this isn’t always a viable option, but check with your bank to see if they still carry this type of mortgage product.
Improving your credit score is a good idea whether you are self-employed or not. Lenders most often take into account a person’s credit history as the number one indicator of financial responsibility, even if that applicant works freelance.
This doesn’t mean that there are no options available to the freelancer with poor credit, but interest rates will be higher for anyone with less than perfect credit.
The bottom line is that freelancers will have to do extra homework when it comes to applying for a loan of any kind. When the majority of income shows up on a 1099 tax form, lenders will have a stack of paperwork and plenty of questions for which you need to be prepared.
You will probably be required to show copies of bank statements going back several months or even a few years, commission sheets, tax returns going back at least three years and any other crucial paperwork that can verify income.
Rather than be discouraged at the extra steps you need to take, be prepared and always one step ahead in the game if you want to prove your financial responsibility to lenders.