It started with a conversation with the mortgage broker down at my bank. My husband and I were looking into selling our current home and upgrading to a larger house, in hopes of taking advantage of ultra-low interest rates to secure a bigger house without a bigger mortgage payment.
“I see that you don’t have – ” he paused, shifting to his most serious tone of voice, ” – er, traditional employment.” He said those words – traditional employment - as though they’d be a shock to me and my husband. Obviously, they weren’t. We both were well aware of the fact that, as a freelance writer, my career path was outside the norm. I received 1099s every January instead of W-2s; I never filled out W-4s when starting a new project. I set my own hours, claimed my own projects, answered to no one but myself. My “non-traditional” employment was everything I’d always dreamed it would be: fun, flexible, freeing.
The bank didn’t see it that way.
My “Unstable” Income
As the mortgage broker went over the paperwork I’d brought in to launch the mortgage preapproval process, he hemmed and hawed over my numerous 1099 forms. He bristled when he saw the 1040 deduction schedule attached to my tax returns. He scoffed at many of the invoices I’d maintained to record who was paying me what and when.
“We won’t be able to acknowledge a lot of this,” he said, waving a few 1099s and invoices in his hand. I asked him why. “Well,” he started, then again paused, a habit I was quick to notice, “you haven’t been doing this [and by "this" he meant freelancing] for long enough. The underwriters want to see two full years of freelance employment before they consider your income to be stable.
Had he just called my income unstable?
Oh snap. He had.
The Instability Affect
At first, I thought my lack of so-called “stable” income would have a nominal affect on our mortgage application. By this point, I’d been freelancing in some capacity for more than a year and a half. When the mortgage broker announced that the underwriters wanted to see proof of at least two solid years of freelance experience, I figured the bank would probably average out the income I’d earned during 18 months of freelancing over the requisite 24 month period.
I thought wrong.
Banks and other lenders use two main financial factors when deciding on a loan application. Both of these factors revolve around something called your DTI, or debt-to-income ratio. The “front end” DTI ratio compares your monthly gross income and your estimated monthly mortgage payment. Underwriters want that front end number to be at or below 33 percent. For example:
$1300 (monthly mortgage payment estimate) / $4000 (gross monthly income) = 0.325, or 32.5 percent
That scenario would work out in your favor. Increase your estimated monthly mortgage payment by $100, however, and you’re looking at a front end DTI of 35 percent, well above the underwriters’ guidelines.
Meanwhile, the “bank end” DTI ratio compares your overall monthly debts – things like car payments and student loans, along with your mortgage – to your gross income. To be approved for a mortgage, you’ll need a back end DTI at or below 41 percent, although many banks prefer borrowers to have a back end DTI of 38 percent or less.
The underwriters opted to only count half of the income I’d earned freelancing over the previous year and a half, then spread that income out over 24 months. The result? While I had earned an average of $1200 or more a month, the bank only gave me credit for $450 a month. That left my husband and I well short of the DTI we needed to qualify for the mortgage we wanted.
Misery Loves Company
Turns out, I’m not the only one being called out for having a lack of stable income. Crystal, who writes “Budgeting In The Fun Stuff,” recently posted about her and her husband’s house hunt. The bank had done the same thing to Crystal and Mr. BFS that they’d done to me and my husband. Crystal and I talked about it, and came up with a singular conclusion:
Our income is more stable than the traditional employee’s.
How’s that, you say?
Think about most conventional jobs. You work for a single employer, earn a single paycheck. What happens if you get sick and can’t go in to work? You lose that one job, that one paycheck. What about if you get laid off or fired? Again, you lose that one job and the paycheck that went along with it. But in my case, if I’m sick, it doesn’t affect my work; I don’t have an office to go into or co-workers to infect, so even when I’m feeling ill, I am still able to work. And if, God forbid, one of my contractors were to fire me, I’d still be receiving paychecks from five others.
To recap:
- You lose your traditional job, you lose 100 percent of your income
- I lose one of my freelance contracts, I lose roughly 16% of my income
Whose income sounds more stable now?
Room To Negotiate
You have to know one thing about me: I like to argue. Negotiating should be my middle name, because I am good at it. Years ago, I received what I considered to be substandard service from a telecom provider. When I called the company’s customer service line, I asked the call representative to transfer me to his manager – I continued doing so until I was speaking to the company’s regional vice president. In the end, I haggled my way to six months of free service.
So naturally, it was my first instinct to argue with the mortgage broker about what the underwriters had decided regarding my monthly income. After all, I’d worked my butt off over the previous 18 months to get to a solid place financially and professionally. It was an insult to be credited for a mere third of that work. But when I started negotiating with the broker about my income, he said his hands were tied – he wasn’t at liberty to refute the underwriters’ decisions or to amend them in any way.
I left the bank knowing I had one of two options to move ahead:
- Wait until my freelance career reached the two year mark, at which point my husband and I would reapply for the second mortgage
- Shop around with other lenders, including banks and credit unions that make in-house application decisions, for an institution that will look at me and my work instead of just estimated numbers on a page
Ultimately, my husband and I decided to shop around, a process we’ve yet to complete.
Reader, do you agree with the bank – that I have an unstable income? Or do you agree with me, that I do have stable income? Why or why not?
