Regardless of your identity, obtaining a mortgage may seem unattainable if your income is non-traditional, or what the media refers to as “variable,” until you actually try.
In the gig economy, it can seem as though everyone else is getting their own space while you haven’t even received an invitation to the celebration. This is due to the fact that mortgage lenders typically prefer to see consistent income with no job gaps; the longer the better But thats todays reality. Self-starters, or people who aren’t interested in moving up the corporate ladder, have discovered that working outside the box can increase their income and give them more freedom.
Navigating the murky waters of “under the table” income when buying a house can be a tricky proposition. On one hand, you want to be honest and transparent with your lender On the other hand, you’re worried about the potential tax implications of disclosing this income.
In this comprehensive guide, we’ll delve into the intricacies of buying a house with under-the-table income, exploring the risks, potential solutions, and crucial considerations you need to make.
Understanding the Risks
Before we dive into the nitty-gritty let’s acknowledge the elephant in the room: the inherent risks associated with under-the-table income.
- Tax Evasion: First and foremost, failing to report under-the-table income is considered tax evasion, which can lead to hefty fines and even jail time.
- Mortgage Fraud: Lying about your income on a mortgage application is considered mortgage fraud, a serious offense with severe consequences.
- Loan Denial: Lenders are wary of borrowers with unstable or unverifiable income, making it difficult to secure a mortgage.
Exploring Potential Solutions
Now let’s explore some potential solutions for navigating this situation:
- Declare Your Income: The most straightforward approach is to declare your under-the-table income to the IRS and pay the necessary taxes. This establishes a paper trail and allows you to use this income for mortgage qualification.
- Seek Alternative Documentation: If declaring your income isn’t feasible, consider gathering alternative documentation to support your ability to repay the mortgage. This could include bank statements, proof of assets, or letters from satisfied clients.
- Consider a Co-Signer: If your income falls short of the required threshold, a co-signer with a strong credit history and stable income can boost your chances of approval.
Crucial Considerations
Before making any decisions, carefully consider these crucial factors:
- The Amount of Under-the-Table Income: The amount of unreported income significantly impacts your options. A small amount might be overlooked, while a substantial sum requires careful planning.
- Your Credit History: A strong credit history can compensate for a lack of documented income, but a poor credit score can make it challenging to secure a loan.
- The Lender’s Policies: Different lenders have varying policies regarding under-the-table income. Researching and comparing policies is crucial.
Seeking Professional Guidance
Navigating the complexities of buying a house with under-the-table income can be overwhelming. Consulting a qualified mortgage professional or financial advisor can provide invaluable guidance and help you make informed decisions.
Remember, honesty and transparency are paramount throughout the process. Although there may be alluring short cuts, lying about your income has far more long-term repercussions than advantages.
Additional Resources:
- Internal Revenue Service (IRS): https://www.irs.gov/
- Federal Housing Administration (FHA): https://www.hud.gov/program_offices/housing/sfh/nsc
- National Association of Realtors (NAR): https://www.nar.realtor/
With careful thought and expert advice, you can successfully navigate the process of purchasing a home with under-the-table income.
So, can gig workers buy a home?
Absolutely. Even though it’s more difficult, it is still possible to get approved for a home loan if your paychecks are irregular. There are just some things you need to do a little differently. Read on.
Get pre-approved before house hunting
Get approved for a mortgage before visiting open houses, unless you are ready to pay cash for a new home. Pre-approval not only shows you how much house you can afford, but it also saves you time by allowing you to bypass properties that you can’t afford. Plus, real estate agents love buyers who know their budgets. It saves them a lot of energy and frustration and makes for a better home shopping experience.
Think “Net” income
Every lender needs to verify a borrowers income. That can be difficult if the borrower is a musician, for example, as they may book steady gigs for a few months before going for an extended period of time without any work at all. Lenders should exercise extra caution when lending money to borrowers who might not have a reliable source of income.
Thus, if you work for yourself and are seeking for a mortgage, don’t be shocked if you and your lender have different opinions about how much money you actually make. In the absence of precise figures, lenders may compute your average monthly income by dividing your net income from the preceding two years by 24 months, rather than your gross income. When you use the same formula with gross income, the amount they arrive at may not match the amount you were hoping for.
Gather your taxes
Since you dont have W2 forms, youll need to provide 1099s if you have them. Also, two years’ worth of tax returns are required, which is the same requirement for employed borrowers with full-time jobs.
The difference is in how youve previously declared income. If you worked as a full-time dog walker and received cash compensation but failed to report the income to the IRS, the money you earned will not appear on your tax returns. That small bump in getting paid under the table could keep you from getting a house. Rule of thumb? Be honest, keep records and pay your taxes.
Consider your deductions
If you don’t intend to purchase a home right away, you might want to give up some tax deductions that have previously benefited you. Recall that lenders consider your net income rather than your gross income, so all of those tax deductions lower the amount of your net income. Losing them might boost your taxable income, which may help you qualify for a larger loan.
Document everything
It’s a good idea to start gathering these documents now, before you get too far along in the house-buying process, as these are the ones you might be asked for.
- Your Schedule C / 1040 tax form
- If you established a corporation, S Corp, or business partnership, your Schedule K-1 / 1065 tax form Should this apply to you, you might also need to provide the last two years’ worth of business tax returns.
- Your business license, if required in your field
- Bank statements from the past few months
- Profit and loss statements (if you don’t already have one, your lender can assist you in creating one)
- Landlord letters detailing on-time rent payments, including the amount
- Letters from clients verifying the length of the working relationship
Keep personal and business expenses separate
A lot of contract workers and freelancers swear by maintaining a business bank account that is 10%0% separate from personal funds. Thisll help underwriters better understand deposits and expenses associated with business income.
Save, save, save
One of the advantages of being a gig worker is you work when you want. You might work only half the year or maybe you work a month and a month off. Hollywood actors are gig workers, too. Theres no fat paycheck when theyre in between TV shows. The difference? They bank earnings from each gig to tide them over until the next.
Lesson here? Gig workers need to be good at saving. You must demonstrate your ability to pay for a mortgage for at least a year in order to be pre-approved for one. As long as the numbers add up, you can still qualify.
Dont spend beyond your means
If your average monthly income is determined by net income rather than gross income, you might receive a smaller offer than you were hoping for. To appear less risky, rethink your target price range and have more cash to put down. That will strengthen your case and, eventually, result in easier-to-afford monthly mortgage payments, particularly if you foresee future gaps in your employment.
Bonus: If you have enough money saved and a solid credit history, you’ll likely be given the same rates as a borrower with a regular job. So make it easier on yourself and seriously consider a less expensive home.
Avoid PMI
Keeping monthly mortgage payments low is a smart move for gig workers who have variable incomes. To help, make a down payment of at least 20% so you can avoid costly private mortgage insurance. Also referred to as PMI, this insurance is a safety net for the lender should the loan default. Its calculated annually, divided into 12 payments and included in your mortgage each month.
Dont forget debt
Like any potential home buyer, gig workers should try to reduce their debt as much as possible. This results in a debt-to-income ratio (DTI) that is more appealing. The DTI is the difference between your annual income (net income in your case) and total debt. DTI is a tool used by lenders to assess borrowers’ ability to make monthly payments and pay off other debts.
According to NerdWallet, some lenders like to see a DTI ratio of 36% or less, and most will cap total housing and other monthly debt payments at about 43% of income. Some might go higher, but as a general rule for gig workers, try to keep debt to a minimum if youre in the market for a home.
In addition, try to pay off business loans to lower your DTI if you are in a partnership or have incorporated for taxation purposes.
Be meticulous about credit scores
If your income is variable, lenders will demand a good credit score. Try to raise it to 700 before applying for a home loan—long before— as this is the recommended amount. Even though a lower score won’t prevent you from getting a home loan, a higher score will get you better terms and lower interest rates, which will make your monthly payments more manageable. Learn more about improving credit scores here.
Point out your year-over-year increases
Hopefully, your side hustle is working. Your chances of being approved will increase if you can demonstrate that business is booming and that your income is increasing annually. You have two years’ worth of tax documents to support this, but if you want to present a more favorable picture, go back a few more years than necessary.
3 Things to Know If You Get Paid Cash Under the Table
FAQ
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