4 ms·

The Catch-22 for Freelance Workers Trying to Buy Homes

23 points by kungfooey 17y ago

NathanKP 17y ago
I guess banks are doing all they can to try to ensure that people won't end up defaulting on their home mortgages. If only they had been strict from the start with their requirements rather than giving loans out so readily five years ago. That could have stopped a lot of the foreclosure problems we are having now in the US. Now the banks finally choose to crack down, but at the expense of legitimate people who would like to get a home.
jleyank 17y ago
While my experience might not be typical, 25+ years of chasing work (strongly) suggests that purchasing a house is NOT a good thing to do if you cannot change jobs without changing locations. Otherwise, getting laid off mean selling your house at short notice, often in a declining market, ... So, if you are highly sought after in the valley, or Austin or some other secure technical area, go for it. Otherwise, keep the strengths and weaknesses in mind as tenants.
- Dove 17y ago
  I agree. The flexibility of renting is highly attractive. Houses are only winning investments if you stay in them for several years, and may be losers altogether if they discourage you from pursuing certain jobs.
javery 17y ago
If freelancers establish an S-corp or LLC and pay themselves regularly using a payroll service it should make it much easier. I have done this since I went independent 5 years ago and it has helped greatly when dealing with banks (I got my mortgage before I went independent though but I would assume it would help with that). This eliminates the majority of the complaints banks have. The income is well documented and steady, and you can have money in the bank to show them.
- petercooper 17y ago
  FWIW, I know of someone who set up a corporation, hired themselves, funneled some of their savings through the corporation back to themselves as income, then once they had 3 payslips (what the mortgage companies wanted), they got the mortgage they wanted. They had to pay income taxes on the money, of course, but they could effectively create any level of income they wanted that way. Thankfully I didn't have to go to such crazy extremes. I went to a mortgage broker and they somehow made the mortgage company happy with three years of tax returns (on a normal, non-self-approved rate too).
javery 17y ago
"And freelancers appear to make less than their W-2 counterparts, as their up-front income doesn’t reflect the business deductions that will lower their taxes later." This line makes no sense at all. Almost all freelancers will appear to make MORE than their W-2 couterparts and it isn't until you factor in payroll taxes and things like retirement/healthcare benefits that you figure out what a freelancer actually makes.
- mrkurt 17y ago
  The mortgage companies ask for 1040s from previous years, so they're generally looking at your take home after taxes. When I was self employed, my take home was generally substantially less than it could have been, because I could leave money in the corporation. I suspect it's similar for most people who use corporations intelligently.
  - javery 17y ago
    Sorry, your 10-40 should report your corporate income as well if you use a LLC or S-Corp so it would still be represented there. (this is why they call it pass-through taxation) Unless you had a C-corp which doesn't make any sense for a freelancer.
    - mrkurt 17y ago
      Oh, you're right. Gah.
mrkurt 17y ago
This is why we opted to buy a house before we'd saved as much of a down payment as I would have liked. I went (partially) through the mortgage process as a self employed (or homeless, as far as the banks are concerned) individual, and it was a nightmare. I accidentally became employed about a year ago, and we opted to buy a house three months ago to take advantage of the fact that we could land a mortgage without jumping through too many hoops. Even still, I had to show quite a bit of paperwork from my self employed time. I can now safely lose my job and still have a mortgage.
- jhancock 17y ago
  This is the home buyer's own little perk of "mark to market" behavior. "Your making $X today? OK, we can safely assume that will be the same tomorrow.". Sometime bad accounting practices work in your favor. Congrats on getting in while you could/wanted to.
nfriedly 17y ago
This is why I want to pay cash for my house.
scott_s 17y ago
I don't see a catch-22, I just see freelance workers having more difficulty than salaried workers. That is, I see no circular dependency (you want to do A, but A requires B, and you can't do B because B requires A).

23 points by kungfooey 17y ago

I guess banks are doing all they can to try to ensure that people won't end up defaulting on their home mortgages. If only they had been strict from the start with their requirements rather than giving loans out so readily five years ago. That could have stopped a lot of the foreclosure problems we are having now in the US. Now the banks finally choose to crack down, but at the expense of legitimate people who would like to get a home.

jleyank 17y ago

While my experience might not be typical, 25+ years of chasing work (strongly) suggests that purchasing a house is NOT a good thing to do if you cannot change jobs without changing locations. Otherwise, getting laid off mean selling your house at short notice, often in a declining market, ... So, if you are highly sought after in the valley, or Austin or some other secure technical area, go for it. Otherwise, keep the strengths and weaknesses in mind as tenants.

Dove 17y ago
I agree. The flexibility of renting is highly attractive. Houses are only winning investments if you stay in them for several years, and may be losers altogether if they discourage you from pursuing certain jobs.

javery 17y ago

If freelancers establish an S-corp or LLC and pay themselves regularly using a payroll service it should make it much easier. I have done this since I went independent 5 years ago and it has helped greatly when dealing with banks (I got my mortgage before I went independent though but I would assume it would help with that). This eliminates the majority of the complaints banks have. The income is well documented and steady, and you can have money in the bank to show them.

petercooper 17y ago
FWIW, I know of someone who set up a corporation, hired themselves, funneled some of their savings through the corporation back to themselves as income, then once they had 3 payslips (what the mortgage companies wanted), they got the mortgage they wanted. They had to pay income taxes on the money, of course, but they could effectively create any level of income they wanted that way. Thankfully I didn't have to go to such crazy extremes. I went to a mortgage broker and they somehow made the mortgage company happy with three years of tax returns (on a normal, non-self-approved rate too).

javery 17y ago

"And freelancers appear to make less than their W-2 counterparts, as their up-front income doesn’t reflect the business deductions that will lower their taxes later." This line makes no sense at all. Almost all freelancers will appear to make MORE than their W-2 couterparts and it isn't until you factor in payroll taxes and things like retirement/healthcare benefits that you figure out what a freelancer actually makes.

mrkurt 17y ago
The mortgage companies ask for 1040s from previous years, so they're generally looking at your take home after taxes. When I was self employed, my take home was generally substantially less than it could have been, because I could leave money in the corporation. I suspect it's similar for most people who use corporations intelligently.
- javery 17y ago
  Sorry, your 10-40 should report your corporate income as well if you use a LLC or S-Corp so it would still be represented there. (this is why they call it pass-through taxation) Unless you had a C-corp which doesn't make any sense for a freelancer.
  - mrkurt 17y ago
    Oh, you're right. Gah.

mrkurt 17y ago

This is why we opted to buy a house before we'd saved as much of a down payment as I would have liked. I went (partially) through the mortgage process as a self employed (or homeless, as far as the banks are concerned) individual, and it was a nightmare. I accidentally became employed about a year ago, and we opted to buy a house three months ago to take advantage of the fact that we could land a mortgage without jumping through too many hoops. Even still, I had to show quite a bit of paperwork from my self employed time. I can now safely lose my job and still have a mortgage.

jhancock 17y ago
This is the home buyer's own little perk of "mark to market" behavior. "Your making $X today? OK, we can safely assume that will be the same tomorrow.". Sometime bad accounting practices work in your favor. Congrats on getting in while you could/wanted to.

nfriedly 17y ago

This is why I want to pay cash for my house.

scott_s 17y ago

I don't see a catch-22, I just see freelance workers having more difficulty than salaried workers. That is, I see no circular dependency (you want to do A, but A requires B, and you can't do B because B requires A).