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, this article shares some of the things you need to know. But before that, let’s take a look at the proof of income for mortgage and other essential documents that you need to prepare.
Income documents for mortgage that you need to prepare
Proof of income – This may come in the form of your W-2 form from the previous year, your latest pay slip, and your tax returns from the year that passed. Proof of income for mortgage will serve as evidence that you have the capacity to repay the loan.
Extra earnings – Detailed information about the money you make from other sources aside from your regular job is another key part of your documentation. Examples include child support or alimony, rental properties, and similar sources of recurring income.
List of debts – If you have credit cards, loans (car loans, student loans, etc.), or child support payments, you need to provide a breakdown of balances and monthly payments. Your debts significantly impact your ability to repay a loan. If possible, settle any outstanding debts before applying for a mortgage.
Inventory of assets – Your financial profile won’t be complete without an account of your assets. These may include bank statements for mortgage application, investment accounts, retirement funds, property titles, or even auto titles. Demonstrating asset ownership helps prove you have reserves available for emergencies post-approval.
Other documents – Additional paperwork you may be asked for includes:
- Signed IRS Form 4506-T, which authorizes your lender to obtain your tax return transcript to confirm its accuracy.
- Bankruptcy discharge documents, if applicable. Even if the bankruptcy is several years old, lenders will want proof of financial recovery and current stability.
Being well-prepared with these mortgage qualification documents strengthens your application and shows your lender you’re serious and financially ready to take on a mortgage.
Consistency is key – in income and industry
Lenders want to see steady or increasing income over the past two years. If your supplemental income fluctuates due to seasonal or contract work, some loan products may allow you to average income over the last 24 months.
Be sure to consult your mortgage banker to find out which home loan options support this. If you operate through a business and pay yourself, try to establish a consistent payment schedule—monthly, quarterly, or similar. Regularity in your income, even if variable in amount, adds credibility.
Consistency in the industry where you earn your income also works in your favor. If your side income comes from your primary field, it reinforces your credibility. For example, a doctor who lectures part-time or a TV producer doing freelance film work shows a continued track record within their profession. This helps convince lenders that this additional income is dependable.
Document a clear (digital) paper trail
Tax returns are only part of the documentation process. Lenders may request bank statements for mortgage application, profit and loss statements, balance sheets, invoices, and current contracts with clients. These serve as supporting materials that demonstrate income stability and future potential. To simplify the process, scan all documents and create secure digital files to share with your lender.
Understand your documentation backwards and forwards
Once you’ve collected all your income documents for mortgage, sit down with your accountant to ensure you understand what you’re submitting. Be ready to explain unusual circumstances, such as a month of unusually high income. Your accountant may be able to write a letter of explanation to include in your file. This kind of detailed clarity can make your application more compelling.
Use your tax write-offs wisely
Tax deductions are a great benefit of freelance or business income, but they can reduce your taxable income on paper. Since lenders use your reported income to calculate your loan eligibility, excessive write-offs can work against you.
Tax write-offs and mortgage approval don’t always align—so talk to your tax professional about what to claim in the year you’re planning to apply for a mortgage. Strategic planning can make a major difference.
Choosing the right lender is like choosing the right business partner
When you’re a borrower with supplemental or variable income, choosing a mortgage lender is about more than finding a good rate. You need someone who understands your financial profile and has the tools to support it. Many retail banks follow a rigid approval process that doesn’t account for the nuance of freelance or inconsistent income.
At Carlyle Financial, our mortgage bankers evaluate your application holistically. We specialize in helping borrowers in entertainment, consulting, athletics, and other non-traditional professions. Whether you have fluctuating income or multiple income sources, we can help you find the right mortgage solution.
Contact us today to learn how we can help you get approved—and move into the home you’ve worked so hard for.