By Dan Reifsnyder
Buying my first house was quite the experience – and, I've come to learn, it can be a very difficult thing to do for many songwriters.
My wife and I had moved to Nashville and were just starting the process of buying a house. We talked to several lenders to get pre-approval (my understanding was that it made the process go smoother), and every conversation went something like this.
Banker: What do you do, Mr. Reifsnyder?
Me: I'm a songwriter, and I also blog and teach private music lessons.
Banker: Um. Okay. Do you have any proof of income?
Me: Sure, I've got 1099s.
It was at that point the bankers usually got pale and stared at me like I had three heads. I'm exaggerating, but only a little. They asked about job security – something they all uniformly seemed very grave about. I told them I had been doing this for nigh on two decades and didn't plan on firing myself anytime soon.
Most of the time, they shook their heads sadly and said they couldn't help. One actually suggested to my wife and I that we get jobs at Walmart (“just short term”), to prove we were “employable” and had “job security.” When I pointed out that you could get fired from Walmart much easier than you could “lose your job” working for yourself, he didn't have any reply.
The bottom line is, a lot of banks don't know what to do with you if you're a working-class songwriter. If you're one of the few who has major hits on the radio right now with gold records and Grammy's adorning your office, they're a bit more comfortable loaning you money.
So what can a songwriter in a similar position do? Based on my own experience, I'm here to help you with a few tips.
Build a team
Probably the most important thing is finding a realtor that caters to the industry. A brand new, wet-behind-the-ears realtor—or even a seasoned one who's never worked with 1099s—is going to have a difficult time wrapping their heads around your situation.
Fortunately, Karol Faragalli, a realtor friend of mine, was a tremendous help in our case. While many realtors got gun shy when they realized our difficulties getting a loan, she stood by us through the process and worked tirelessly to connect us with the right bank.
That meant wading through lenders who asked for pay stubs and freaked out when we didn't have any, or even banks who weren't interested in working with us at all. We did finally find a lender that was willing to be flexible and open minded. It just took a lot of time and patience.We did find a lender willing to work with us, but the underwriting process was long.
The fact is, since the housing bubble burst in 2008, easy credit has been difficult to come by. Banks are very skittish about lending to people who may ultimately not be able to pay back their loans… a big reason the bubble burst in the first place.
Unfortunately, this means they've swung to the other extreme... they've become very reluctant and skeptical of lending to anyone that falls outside the norm. Working with a team that knows the ins and outs of the music industry can change that.
Mike Post, a Nashville realtor agrees.
“Find a Music Row lender, someone with offices on Music Row. Someone like Cory Owens (Regions) is really good at it. There are all kinds of things they can do to massage the loan to make it work, and they deal with industry people every day. If you walk into a typical bank and talk about royalties and advances, their eyes will glaze over.”
In the case of Music Row banks, sometimes you can just walk in with an offer letter or just a Billboard magazine showing your song is on the charts. If they've got an office on Music Row, odds are they have some experience.
Aside from Regions, SunTrust bank also has a robust presence in the music industry. Call or stop in and tell them your situation, and be sure to ask for a representative who is familiar with the music industry.
Although we've been happy with our lender (and grateful to be in our house), in hindsight the process may have gone smoother had we gone to one of the Music Row banks. We were also thrown for a loop every time they asked for more documentation, or more details, or letters from our bosses.
We were very green in the ways of buying a house. I just thought you signed papers and they handed you the keys! Going into the process in the future, I'll have an idea of what they might ask for and have it prepared ahead of time. To help you do the same, here are some of the things a lender might want to see.
Minimum two years of personal tax returns
This is the bare minimum they seem to ask for, though we were ultimately asked to go back three or four. Basically, what they're looking for is some sort of average that you make per year, which their number crunchers will put in a formula to figure out how much you can afford.
In a perfect world, your numbers year to year should be pretty consistent, which will put them at ease. Unfortunately, that's rarely the case with 1099 contractors (especially artists, songwriters etc.) There's great years, good years, and bad years. That's just the way it is.
If you have wildly fluctuating yearly income, be prepared to provide returns even further back. You may even be asked to provide a detailed, written statement explaining any significant decreases year over year.
Profit and loss statement
In addition to the tax returns and detailed statements, lenders often ask for a profit and loss statement. This may throw you for a loop considering this is something normally asked of a business, but in the bank's eyes you are indeed a business since you are a 1099 contractor!
Odds are, you've probably never had to complete one until now, and that alone could make your head spin (I know mine did). Fortunately, it's not as complicated as it sounds. They just want to see any expenses you paid out of pocket while working. As a songwriter, this may include things like gas or mileage (getting to and from a co-write), maybe music editing software or notepads, guitar strings, etc. (If you’re keeping good tax records, this shouldn’t prove to tough a chore).
Then, you look at your profits… any revenue from royalties, playing gigs, selling CDs, etc. To help you out, here is a sample Profit and Loss form – feel free to edit it as needed or create your own!
Lenders may well ask for a signed letter from your CPA stating that you're in business and making money. This is again something that builds confidence in your ability to pay back the loan, and they're hearing it from a third party that has a reputation and career themselves.
This may also include signed letters from employers. For example, my wife was also a 1099 employee at the time as a nanny. Our lender asked for letters from her bosses stating that she was currently employed and would be for the foreseeable future. Depending on your situation, you many need a letter from your publisher. It just depends on how far down the rabbit hole they want to go.
Again, this is all about verifying income. Lenders ask for current bank statements, possibly as far back as a year. Ideally, they want to see you maintain a healthy balance without unusual withdrawals.
Another reason they check bank statements is for “buy here, pay here” loans. In other words, car loans that don't necessarily go through a bank (or show up on your credit), large furniture or electronic purchases, etc. During the underwriting process, try to avoid making any big purchases or you can make the lender skittish.
It might also help to run your catalog through Royalty Exchange’s Know Your Worth app. This free, no-obligation tool gives songwriters an estimated value of their catalog, or potentially a verified offer from pre-qualified investors. Showing this to a lender provides a real, third-party value for your catalog, and can even be an alternative source of funds if the loan process doesn’t work out.
Talk with your accountant
Another sticking point for us 1099 folks are deductions. Since we're self employed, we try to get as much back as we can come tax time. Maximizing our deductions just makes good sense... why would you pay more in taxes than you have to?
The problem is, a bank doesn't always see it that way. If they look at your returns and see huge write-offs (even if you made good money), they may see you as a less than ideal applicant. It boils down to banks looking at gross income for W4 earners, and net for 1099 earners—which automatically puts you at a disadvantage.
If you plan far enough ahead, however, you can possibly avoid this issue. Sit down with your accountant before you file and tell them you're planning on buying a house. You may decide together to take less deductions than you're actually due in order to make your returns more palatable to a bank. Or they may have other ideas to help you out. Either way, it's worth your time to have a conversation about your status.
More and more Americans are self employed, music industry aside. Having a 1099 income is becoming increasingly common, and banks are coming across this issue more often. As a result, the whole system may open up more as lenders become more comfortable with loaning to independent contractors and the self employed.
It's important to note that I'm not a banker, realtor, or CPA. This is just my perspective and understanding. Before making a big purchase like this, be sure to talk to a professional. Every situation is different, even if the broad strokes may be similar. But hopefully this post has helped equip you with some knowledge to be prepared and get the loan you need.