Insurance claims adjusters, especially independent catastrophe adjusters, don’t exactly work a normal 9-5 job. Actually their work schedules can be quite far from the norm. Independent claims adjusters can make quite a bit of money in very short periods of time working catastrophe claims from hurricanes, tornadoes, hail storms, wildfires, winter ice storms and flooding. Work and income can vary greatly throughout the year and even year to year depending on storm severity. Cat adjusters can also incur a lot of job related expenses while deploying from storm site to storm site for work.
Unlike traditional W-2 employees independent adjusters are self employed 1099 workers. For many of these adjusters it can be quite frustrating because it seems like the mortgage process is built solely around W-2 workers. It kind of is but don’t stress. If your income and work history vary wildly it’s okay. Self employed people just have to be a little more creative and can qualify for mortgages too.
Traditionally lenders uses a variety of very important information including your credit score, debt to income ratio, verification of income (on your tax return over a 2-year period), all your debts (car payments, credit cards, student loans, alimony, etc) when qualifying you for a loan, not just taxable income.
First we’ll go over the basics then on to some more creative routes for you to get approved for that dream home.
Watch your credit score
A high credit score will make your mortgage-qualification process easier. You’ll be more likely to qualify for a mortgage and you’ll be more likely to receive a competitive interest rate. Keep your credit score high by paying all your bills on time and keeping your credit-to-debt ratio low.
Avoid opening too many new credit accounts, especially in the six to 12 months before you apply for a mortgage.
Learn more about how your credit score is calculated with FICO's 5 factors: The components of a credit score and get free access to your credit scores with insights and suggestions from Credit Karma.
Review your past two tax returns
Lenders will review copies of your tax returns from the past two years and they’ll look at your adjusted gross income on each form so it’s a good idea to review these yourself. Add your two AGI numbers together for the past two years and divide by 24. This reflects your average monthly income from the past two years and loan officers will look at this number.
Run the numbers yourself to figure out how much you can afford and exactly what you’ll paying per month. Trulia has a pretty great advanced mortgage calculator that can be broken down including principal, interest, taxes, homeowners insurance, HOA fees, and mortgage insurance.
Reduce your debt-to-income ratio
There are two numbers loan officers look at when applying.
- Front end debt: Housing expenses like that mortgage payment you figured out above (including taxes, insurance, HOA fees, etc.) which needs to be less than 31% of your gross monthly income.
- Back end debt: Your total monthly recurring debt payments (including housing, student loans, credit cards, car loans, child support, alimony, etc.) shouldn’t exceed 43% of your income. Reducing back end debt payments will help you qualify for a larger loan.
Work on compensating factors
HUD gives mortgage lenders some flexibility to approve borrowers with debt-to-income ratios higher than the above-stated limits, as long as the lender can find and document significant compensating factors such as:
- Larger down payment: Making a down payment above the minimum could create an exception to the debt-to-income limits mentioned above.
- Successful payment history: If you’ve successfully managed mortgage payments equal to or greater than the estimated payments on the loan you are applying for you may still qualify for the program.
- Substantial savings: HUD also allows FHA debt-to-income exceptions for borrowers who show limited use of credit and substantial savings even if your DTI ratio is higher than the stated limits.
- Minimal increase in housing expense: If the FHA loan being sought will only cause a minimal increase in the borrower's housing expense, he or she may still qualify for an FHA loan with a higher-than-average debt burden.
Don’t take too many deductions
I know. I know. As independent adjusters we usually have a ton of deductions but if you’re prepping to buy a house you might want to think twice about all those itemized deductions because they affect your taxable income.
I hear from fellow adjusters facing this issue quite frequently. They’ve written off quite a bit of job related expenses in effect lowering their taxable income. While paying less in taxes and getting to keep more money in your pocket is usually a great thing, it can lower your taxable income enough to make it difficult to qualify for the mortgage you want when trying to get approved for traditional loans.
A good loan officer should be able to tell you exactly how much your taxable income needs to increase to qualify for the loan you’re applying for.
For the years you’re not buying a house, make sure you check out 3 Ways Independent Adjusters Can Save Money on Taxes.
Local community banks and credit unions are in a better position to set their own guidelines, which might make them a better alternative for borrowers who don’t qualify for loans with mainstream banks. They are also built more around relationships than any large lender you’ll find. They are willing to take risks because they look at the whole picture of a borrower’s situation using more of a common sense approach.
If you are self employed and have significant write-offs that you take advantage of, a bank statement loan program may be the best solution for you. With this type of loan, your approval is NOT based on your tax returns.
Your income is calculated based on 24 months of bank statements (12 months on case by case basis). You can use personal or business bank statements depending on your scenario. You must be self-employed with the same business for at least 2 years.
If you have been self-employed less than 2 years you may need to look into getting a different portfolio loan.
Use your adjuster network
To find a good local bank or credit union, you could select a local real estate agent first that is highly active and extremely well regarded in your community and ask him or her to recommend a community bank, or even better, you can use your existing adjuster network.
Most likely you know someone who’s been through it before. Request the name of their loan officer and ask if you can use his or her name as a referral. They’ll be more than glad to help.
As a 1099 adjuster, I bought 10 single family houses and 2 apartment buildings as rentals all while I was still single. It is definitely possible! The reality is that these scenarios are fairly common, and people think they are stuck. You just need to think outside the normal mortgage box and deal with creative people that are right for your situation. Create a relationship with a smaller local bank in your area. I am going to call this your “relationship” bank. Buy one property and then refinance that property at another bank. Go back to your “relationship” bank and get pre-approved for your next property. Then repeat.
You can do whatever you set your mind to in this world. Just do it!
See ya on the storm,
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