ICBA Blog

5 Tips for Freelancers Applying for Financing

Looking to buy a house or a car and need a loan? Here’s what you need to do to get your finances in order

 The workforce has changed rapidly in the last several years. Nearly one third of workers now identify as independent contractors. Unfortunately, this gig economy trend doesn’t make it any easier for freelancers to land a mortgage or a car loan. The nine-to-fiver with a regular paycheck stub still has a much smoother time. But that doesn’t mean you’re out of luck. With a little legwork and planning, independent contractors can prove their worthiness to lenders and snag the keys to a new home or set of wheels.

Build your work history
For a mortgage, many lenders will require freelancers to show proof of a steady stream of income from their business that dates back at least two years, so it helps if you wait to shop for a home loan until you’ve been freelancing for a while. Some mortgage lenders will give leeway for independent contractors who’ve left full-time jobs to freelance in the same industry—as long as they can prove they have a stash of regular clients. There might be a little more wiggle room when seeking a car loan, but you could pay a higher interest rate than someone who rakes in a full-time salary.

Keep meticulous income records
Proving your income happens in several ways, so detailed records are important. One of the most obvious forms of proof is your tax return. But lenders also like to look at your bank statements dating back several months. They’ll be curious about your deposits and may ask for explanations on each one. This can feel daunting, especially if your business earns a lot of small payments. If you use a cloud accounting system like Freshbooks or Harvest, you’ll be able to tie your deposits to your invoices, making all of this a bit easier. If you deposit checks using your bank’s mobile deposit system, save the confirmation emails that show a picture of the check and save the actual check, as well.

Reduce or wipe out debt
Freelancers often have to rely on credit cards, especially when client payments are late, projects get delayed, or when there’s an ebb in workflow. If you’ve racked up a bit of debt, try to pay it down before seeking lending so that your debt-to-income ratio (DTI) is less than 43%. That’s the highest ratio most mortgage lenders will accept, according to Nerd Wallet. Your DTI is your total monthly debt payments, including student loans and child support, divided by your monthly income.

Build your credit history and rating
In addition to your DTI, lenders will look at your FICO score and credit history. Aim to get your score above 700 if possible to get in the “good credit” range. Check your credit report from the three credit-reporting bureaus (Equifax, Experian, and TransUnion) before seeking a loan.

Not only is it important to know you’re score, you’ll also want to mine your credit report for any misinformation or fraud, which you can then dispute. If you have negative information on your credit report, like late payments or nonpayment, you’ll want to be aware of it. Most negative information is removed from your report after seven years. Negative info doesn’t necessarily mean you won’t get a loan, but you may have to explain why it’s there. A good payment history on utility bills and any other loans will help you when it comes to proving your ability to pay to a lender.

Avoid taking out any new lines of credit while seeking a mortgage or car loan. Don’t apply for credit cards, even if the in-store offer is tempting, and don’t use your cards to make pricy purchases. Any credit inquiry will show up on your report, and hard inquiries can ding your score.

Build your assets
Lenders also take into consideration your assets. Assets include money in the bank, retirement funds, certain investments, and even valuable personal property. A savings account with a consistent level of cash in it will go a long way in proving your credit worthiness for buying a car or house.