At least 16 million people in the US are self-employed. While it can be a good way to make a living, it also comes with its challenges — namely when buying a home.
Thats because when you apply for a mortgage, your income plays a big role — and self-employed pros often have less-than-reliable earnings. This can make it hard for lenders to feel confident they can make their payments.
Fortunately, buying a home while self-employed isnt impossible — it just takes some careful preparation. Here’s what you need to know about self-employed mortgages and how to make the application process go more smoothly.
It may be harder for self-employed people to get a mortgage than for people with a W-2 job. Being your own boss gives you freedom and flexibility, but it can be hard to get a home loan when you’re self-employed. Self-employed applicants are looked at more closely by lenders to make sure they can reliably make mortgage payments.
As a freelancer or small business owner, you can get a competitive mortgage rate, but only if you make the right plans and have good credit. If you are self-employed and want to get a mortgage, here is what you need to know.
Why Is It Harder To Get a Mortgage When Self-Employed?
When you apply for a mortgage as a W-2 employee, verifying your income is straightforward for lenders. They simply review your recent paystubs, W-2s, and confirm employment details with your employer. For self-employed applicants, it’s not that simple. Here are some of the key reasons getting a mortgage is more difficult if you’re self-employed:
-
Unstable Income: Self-employed people don’t usually get a steady salary. Instead, their monthly income changes a lot. Lenders don’t know if you can pay a mortgage because you don’t have a reliable income history.
-
Multiple Income Sources: Whereas W-2 employees generally have one stream of income from their job, self-employed people can have many different revenue streams. Tracking and verifying varied income sources is more complex for lenders.
-
Tax Write-Offs Writing off business expenses reduces your taxable income. But it also lowers the amount of income lenders use to decide if you can get a mortgage, which could mean you can’t get one.
-
Short Self-Employment Duration If you only recently became self-employed you likely won’t have the 2 years of income history most lenders look for.
-
Higher Risk: With riskier, less verifiable incomes, self-employed borrowers are seen as riskier than conventional borrowers by lenders. The extra risk results in more scrutiny.
Documentation Needed for a Self-Employed Mortgage
Self-employed mortgage applicants need to provide documentation beyond the typical paystubs and W-2s. Here are some common documents lenders ask for:
-
Tax Returns: At minimum the past 2 years of personal and business returns. Returns help establish your income history.
-
Profit & Loss Statements: Documents showing the financial health and profits of your business over time.
-
Bank Statements: Statements from your personal and business accounts. These verify income deposits and savings.
-
1099s: Any 1099 tax forms from contract work show additional income sources.
-
Business Licenses: Required licenses demonstrate you operate a legitimate business.
-
CPA Letter: A letter from your accountant can validate your self-employment.
Providing every piece of documentation possible allows lenders to fully verify your various income streams. Be sure to save all financial records related to your business.
Tips for Strengthening Your Self-Employed Mortgage Application
Since getting approved for a home loan is harder without a W-2 job, self-employed borrowers need to take extra steps to boost their chances:
-
Improve your credit score: Aim for at least a 680 credit score or higher. Pay down debts and make on-time payments.
-
Lower your DTI: Reduce monthly debts and liabilities so more income is available for a mortgage.
-
Make a larger down payment: A down payment above 20% signals you are financially stable and able to save.
-
Grow your savings: Robust savings and cash reserves reassure lenders you can cover mortgage payments in income dips.
-
Explain income fluctuations: Provide documentation detailing any big income changes year-to-year.
-
Consider a co-signer: Adding a co-signer with higher income and credit can improve your approval odds.
Meeting conventional mortgage requirements proves your financial health and stability as a self-employed borrower.
Mortgage Options for the Self-Employed
Beyond traditional loan programs, other mortgage solutions exist for borrowers unable to qualify for a conventional loan:
FHA Loans
Offered by the Federal Housing Administration, FHA loans are more flexible than conventional mortgages in their credit and down payment requirements. Minimum FICO scores can be as low as 580 with a 10% down payment.
VA Loans
Veterans Affairs loans provide zero down payment options and looser underwriting to military members, veterans, and their spouses. No minimum credit score is set.
USDA Loans
For low-to-moderate income borrowers in rural locations, USDA loans have no down payment requirement and no minimum credit score.
Bank Statement Loans
These specialized mortgages verify your income using personal bank statements rather than tax returns. This helps if your taxable income is low. Bank statement loans permit higher DTIs and lower credit scores but have higher rates.
Alternative Lenders
Non-QM lenders offer various unconventional loan programs that cater to self-employed buyers unable to qualify through Fannie Mae and Freddie Mac conventional loans.
Working With a Mortgage Broker as a Self-Employed Borrower
Mortgage brokers have specialized knowledge and access to a wider suite of lending options that can benefit self-employed applicants. Brokers match you with the right lenders and loan programs for your situation. Their expertise streamlines the application process.
When choosing a broker, find one experienced working with self-employed clients. Ask about their success working with borrowers like you. Make sure they don’t charge you any fees either.
Key Takeaways
While being self-employed adds complexity to getting a mortgage, homeownership is still achievable if you put in effort. Critical steps include maintaining robust savings, keeping an immaculate credit history, and securing a sizable down payment. Seeking out alternative lenders and mortgage brokers also provides better loan options.
Careful financial planning and preparation well ahead of your home purchase lets self-employed borrowers present the strongest case possible to lenders. With diligence and patience, you can get approved for a competitive mortgage rate despite not having a traditional job. Don’t get discouraged if your first application gets denied – explore all your options.
Finding brokers experienced with self-employed clients
There are many mortgage brokers to choose from, so youll want to do your research before choosing who to work with. Interview a few, ask them about their experience with self-employed borrowers, and make sure your communication styles match up.
You should also ask about fees. While most brokers get paid commissions by the lender you eventually choose, youll want to make sure you dont owe any additional fees to the broker, too.
Do self-employed individuals face higher interest rates?
Not necessarily. While self-employed borrowers may undergo more scrutiny in the mortgage application process, securing a competitive interest rate is possible with a strong credit score and low debt-to-income ratio.
Is It Harder to Get a Mortgage Self Employed?
FAQ
Can I get a mortgage if I’m self-employed?
While you certainly can get a mortgage if you’re self-employed, you will likely have additional underwriting requirements to prove your income. Learn more about the application process for a self-employed home buyer, how to get a mortgage if you’re self-employed, and the pros and cons.
How long do you need to be self-employed to get a mortgage?
Most borrowers want to see that you’ve been self-employed for at least two years before they consider you for a mortgage. In addition to the documents that everyone needs to apply for a mortgage, such as bank statements and identification, self-employed applicants will also need to provide additional documentation to potential lenders.
What does it mean to be self-employed for a mortgage?
Qualifying for a mortgage when you’re self-employed means showing the lender that you can make payments for the entire length of the loan. Here’s what lenders want to see from self-employed mortgage applicants: Stable or increasing income. Some fluctuation is acceptable, but that’s why lenders like to see two full years of tax returns.
Does being self-employed disqualify you from getting a mortgage?
Absolutely, being self-employed does not automatically disqualify you from obtaining a mortgage. In fact, there are various types of mortgages for self-employed individuals designed specifically to meet their unique personal finance needs.
Can I get a non-QM mortgage if I’m self-employed?
You’ll have a better chance of getting a non-qualifying mortgage (non-QM) if you’re self-employed or have income that changes often. These are home loans with more flexible terms that accept non-traditional income sources. Examples of non-QM loans for self-employed borrowers include:
What factors do mortgage lenders consider when you’re a self-employed borrower?
Mortgage lenders also consider the same factors when you’re a self-employed borrower: your credit score, debt, assets and income. What’s the difference? If you have a boss, the lender will check with them to make sure you have a job and are making enough money.
Is it hard to get a mortgage when you are self-employed?
It’s often harder for self-employed borrowers to get a mortgage because proving consistent income can be difficult. Improving your credit, making a large down payment, and increasing your savings can help with approval.
Is it hard to get a loan when self-employed?
Applying for a loan when you’re self-employed can be complicated. Without pay stubs or a letter from your boss, you’ll have to show lenders proof of your income. But getting approved for a loan is still possible if you know what to do.
How long do you have to be self-employed to get a home loan?
Most mortgage lenders require at least two years of steady self-employment before you can qualify for a home loan. Lenders define “self-employed” as a borrower with an ownership interest of 25% or more in a business, or one who is not a W-2 employee.
Is it hard to get a mortgage if you own a business?
In general, with a few exceptions, the reason why people say it is so hard to get a mortgage as a small business owners is that small business owners overwhelmingly write off a lot of expenses against business income that would be paid with after-tax money if they were a W2 employee.