

The Catch-22 for Freelance Workers Trying to Buy Homes - kungfooey
http://nymag.com/realestate/realestatecolumn/58832/

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javery
"And freelancers appear to make less than their W-2 counterparts, as their up-
front income doesn’t reflect the business deductions that will lower their
taxes later."

This line makes no sense at all. Almost all freelancers will appear to make
MORE than their W-2 couterparts and it isn't until you factor in payroll taxes
and things like retirement/healthcare benefits that you figure out what a
freelancer actually makes.

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mrkurt
The mortgage companies ask for 1040s from previous years, so they're generally
looking at your take home after taxes. When I was self employed, my take home
was generally substantially less than it could have been, because I could
leave money in the corporation. I suspect it's similar for most people who use
corporations intelligently.

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javery
Sorry, your 10-40 should report your corporate income as well if you use a LLC
or S-Corp so it would still be represented there. (this is why they call it
pass-through taxation) Unless you had a C-corp which doesn't make any sense
for a freelancer.

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mrkurt
Oh, you're right. Gah.

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jleyank
While my experience might not be typical, 25+ years of chasing work (strongly)
suggests that purchasing a house is NOT a good thing to do if you cannot
change jobs without changing locations. Otherwise, getting laid off mean
selling your house at short notice, often in a declining market, ...

So, if you are highly sought after in the valley, or Austin or some other
secure technical area, go for it. Otherwise, keep the strengths and weaknesses
in mind as tenants.

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Dove
I agree. The flexibility of renting is highly attractive. Houses are only
winning investments if you stay in them for several years, and may be losers
altogether if they discourage you from pursuing certain jobs.

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NathanKP
I guess banks are doing all they can to try to ensure that people won't end up
defaulting on their home mortgages. If only they had been strict from the
start with their requirements rather than giving loans out so readily five
years ago. That could have stopped a lot of the foreclosure problems we are
having now in the US.

Now the banks finally choose to crack down, but at the expense of legitimate
people who would like to get a home.

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scott_s
I don't see a catch-22, I just see freelance workers having more difficulty
than salaried workers. That is, I see no circular dependency (you want to do
A, but A requires B, and you can't do B because B requires A).

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javery
If freelancers establish an S-corp or LLC and pay themselves regularly using a
payroll service it should make it much easier. I have done this since I went
independent 5 years ago and it has helped greatly when dealing with banks (I
got my mortgage before I went independent though but I would assume it would
help with that).

This eliminates the majority of the complaints banks have. The income is well
documented and steady, and you can have money in the bank to show them.

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petercooper
FWIW, I know of someone who set up a corporation, hired themselves, funneled
some of their savings through the corporation back to themselves as income,
then once they had 3 payslips (what the mortgage companies wanted), they got
the mortgage they wanted. They had to pay income taxes on the money, of
course, but they could effectively create any level of income they wanted that
way.

Thankfully I didn't have to go to such crazy extremes. I went to a mortgage
broker and they somehow made the mortgage company happy with three years of
tax returns (on a normal, non-self-approved rate too).

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mrkurt
This is why we opted to buy a house before we'd saved as much of a down
payment as I would have liked. I went (partially) through the mortgage process
as a self employed (or homeless, as far as the banks are concerned)
individual, and it was a nightmare. I accidentally became employed about a
year ago, and we opted to buy a house three months ago to take advantage of
the fact that we could land a mortgage without jumping through too many hoops.
Even still, I had to show quite a bit of paperwork from my self employed time.

I can now safely lose my job and still have a mortgage.

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jhancock
This is the home buyer's own little perk of "mark to market" behavior. "Your
making $X today? OK, we can safely assume that will be the same tomorrow.".
Sometime bad accounting practices work in your favor. Congrats on getting in
while you could/wanted to.

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nfriedly
This is why I want to pay cash for my house.

