I Tried Everything to Buy a House as a Freelancer — Nothing Worked
Earlier this year I tried to buy a house in Maine. I was three years into the pandemic and three and a half years out from a traumatic brain injury that has lingered for much of the pandemic. I didn’t just want a home, I wanted a place to escape. What I learned as I longed for my escape from the crushing reality of injury and social ills was that mortgage practices haven’t caught up with modern ways of working, and no one had told me.
You see, for the previous three years, I had a steady job working at an artificial intelligence startup. When I left the startup in February, I had a few months of severance and then began freelancing. I was making not quite as much as I had before, but enough that I assumed getting a mortgage for a dreamy cottage in coastal Maine would not be a problem. I was wrong.
The most shocking thing I learned on my journey is that what impacted me was likely to also impact the 36 percent of the population that freelances and the 16 percent of the population who is over age 65. If you are in that category, there are five important things you should know if you’re looking to buy a house but have less than two years of freelance earnings or are permanently (by choice or otherwise) unemployed.
There are several different kinds of mortgages available to people in my situation: primary, secondary, investment, business, asset-secured, and collateral-secured. I went through nearly all of them.
A W2 is still the primary way that banks verify candidacy for a mortgage.
In June of 2021, I was eligible for a mortgage that made buying an apartment in New York City feasible. By June of 2022, no traditional bank would take me on. The reason? The majority of a bank’s decision to fund a mortgage is directly tied to your W2 wages. Your assets or other income streams are not as big a factor when crunching the numbers. Their assumption is that a traditional job means you will be able to pay back a loan, ignoring the fact that Americans switch jobs on average every few years, 25 percent of people are likely to quit their job post-pandemic, and in the face of a recession, more people are more likely to lose a job than ever before. And a lot of this legislation was put into practice following the 2008 housing crisis. It’s not bad policy, per se, but it’s policy that no longer reflects the times.
If you’re looking to buy a house and assume that you’ll qualify, it’s important to take time to truly understand what a mortgage is and what banks are looking for: income to repay a loan. This is based on projections that are primarily dependent on current income, as perceived by a banking intuition. This means a W2, more than two years of freelance income, or ownership of a business with a substantial net income. It has little relation to your banking history, credit score, or assets.
My first option: Buy in cash, then get a mortgage after.
After everyone I spoke with denied me a regular mortgage, claiming that my freelance earnings were not defensible because they couldn’t see them over two years of tax history, they suggested I consider buying in all-cash and then getting a mortgage. “Reverse mortgages” or “delayed financing mortgages” became trendy during the pandemic in Maine (and many other places) when individuals with large cash assets began buying second homes. With this option, you can buy a house in all cash, and then go back to the bank and ask them for essentially a mortgage based on that cash asset. You can then get a mortgage, often with a higher interest rate, but it will take months and (!) again, they will want to see a W2 to secure the mortgage again. In my case, I still didn’t qualify.
I learned about investment mortgages.
In order to convince banks that I could afford the mortgage, I thought it might be beneficial to talk to them about how I would consider using this house as an investment property. I had run three other Airbnb properties and understood how to create a business that not only covered the mortgage but was able to provide me with revenue. The moment I mentioned investment, I was shuttled from mortgage brokers who worked on primary and secondary mortgages and into the investment mortgage category. To qualify, you’ll need to prove that local rental prices can cover the costs of the mortgage. For me, looking to buy a run-down property and fix it up over time, those market comps fell short. A broker couldn’t make the case. The chase continued!
I considered a business-secured mortgage.
With typical individual mortgage options off the table, I attempted to secure what’s known as a business-secured mortgage. If you are a freelancer running a business who has a tax return or can show a strong debt-to-income ratio, you may qualify for this type of loan. I thought this might be possible for me. I had been running a small business for over five years, but I had also always been very cognizant of my accountant’s advice to ensure I was spending the money I was receiving in order to lower my tax bill. That advice might have been good for my taxes but it turns out it was exactly the opposite of what the business-secured mortgage brokers required of me. Denied again!
Then I went over the fine print of asset-secured mortgages.
In speaking with my financial advisor about my mortgage woes, she assured me I wasn’t alone. Most of her clients go through this same struggle when they are attempting to buy homes in their retirement. In order to be able to purchase homes, they often have to take large sums of money out of their retirement savings, buy a home and then obtain a reverse or delayed mortgage. It can mean getting checks for hundreds of thousands of dollars delivered to the mailbox. For me, this was my last resort but I was once again foiled. The funds in my financial portfolio were in the places where they needed to be and I would have to move substantial sums of money to qualify. My financial advisor told me that it didn’t make sense.
After all this, I was told to invest with a partner.
At this point, I threw up my hands. The only way I could get a loan to buy a house that I wanted was if I invested with my partner. His W2 income outweighed any associated assets, potential earnings, and the financial well-being I had accumulated over all the years without him. It felt demoralizing at least, and a bit of a patriarchal hell. It seemed too complicated to tie my assets to his bank-approved income and the types of properties he was approved to purchase.
I’ve decided, despondently, to wait for the chance to escape.
If you are going through something similar, you are not alone. The housing market protections put in place to avoid the market collapse actually no longer serve a large portion of the population. Retirees and those new to freelancing or new to freelancing as their primary income source will find it very hard to secure a loan. New legislation is needed to better address the changes in the current housing market. Contacting your congressperson with your story is a good place to start.