The Rise of the New Economy: Moonlighting in the 21st Century
There are 53 million Americans working in the freelance economy. Of those, about 14 million are “moonlighters,” people who are traditionally employed but make supplemental income through things like consulting and freelancing.
That additional income can add up to a pretty penny when combined with your salary and can help you buy your dream home. But how do you document that supplemental income when you apply for a mortgage?
This is a question that will increasingly need to be answered as the freelance economy continues to expand. If you plan to apply for a mortgage and want your supplemental income to be considered, here are some things you need to know.
Consistency is Key – In Income and Industry
Lenders are looking for consistency in your income preferably a steady or increasing income for the past two years. If your supplemental monthly income varies widely due to seasonal ups and downs that are often the nature of consulting and freelance work, it might be an option to average out this income over the last 24 months. This would depend on the loan product you select, so your mortgage banker can discuss the different home loan options available to you.
If you maintain separate business accounts and pay yourself income from there, be sure to maintain as consistent a salary schedule as possible. It can be monthly, quarterly or at other regular intervals, but consistent payments are preferred over say, $2,000 one month and $15,000 the following. When possible, adjust your salary to achieve this kind of consistency. Entrepreneur.com has some interesting adviceabout paying yourself.
Consistency in the field you earn money in will work in your favor too. If the additional income is coming from the industry you are already employed in, it will be easier to demonstrate that this additional revenue is steady. One example would be a doctor who in addition to hospital work, is a guest lecturer at a local university. Another example would be a television producer who also earns income from independent movie contracts. Income related to your full-time occupation shows that you have a track record within an industry, and can expect to earn similar income in the future.
Document a Clear (Digital) Papertrail
Of course you’ll need to provide your tax returns, but you will likely be asked to provide bank statements, profit and loss statements and balance sheets as well. In some cases, documenting past invoices or current contracts you have with clients can serve as supporting information that will strengthen your application and show the likelihood for that income to continue. This is a lot of paper so to make everyone’s life a little easier, scan these documents so they can be presented as a digital file, uploaded securely to your lender.
Understand Your Documentation Backwards and Forwards
Once you have gathered your documentation, sit down with your accountant and make sure you understand everything that will be turned over to a lender. You need to be able to explain things like why you had a big increase in income for a month. It may be that your accountant can help you write a letter of explanation describing your supplemental income to be included in your file. This depends on the individual loan application, so your mortgage banker will be clear if this would benefit you when you discuss your scenario.
Use Your Tax Write-offs Wisely
One of the best parts of having a small business is the tax write-offs, but it may mean you show a decrease in taxable income. If you’re considering a mortgage, speak to your accountant and/or your tax attorney about what expenses should and should not be written off for the coming year. Tax write-offs can be a minefield even when you’re not shopping for a mortgage so work closely with your tax professional to ensure that you’re making the correct decisions.
Choosing the Right Lender is Like Choosing the Right Business Partner
Choose a lender who has not only the kind of specialized knowledge that can be critical when working with borrowers who bring in considerable supplemental income but who also have a wide variety of loan products that can help to meet your specific needs.
For many retail banks, you’re just a series of boxes that either get ticked or don’t, the pass/fail mortgage test. On the other hand, our mortgage bankers will look holistically at your application and find products that will suit your income. This allows for a more personalized experience.
At Carlyle Financial we have helped many people who have variable income, from athletes to those in the entertainment industry, to business consultants and professors move into the home of their dreams. Contact us today to learn how we can help you do the same.