Mortgage BasicsHow to Get a Mortgage if You are Self-Employed?

How to Get a Mortgage if You are Self-Employed?

Being self-employed comes with many advantages, such as the pride of being your own boss and the freedom to choose your schedule and the projects you want to work on. However, it is not without its conveniences. You might experience a significantly heavier workload when tax season comes around or the pressure of securing a regular income. A self-employed status can also hinder if you need to buy a house. So, you may be wondering: “can I get a mortgage if I am self-employed?”

The answer is yes! However, you may need to prepare more paperwork than someone who can obtain a W-2 from their employer. While the application process is similar, would-be borrowers working for themselves can be a red flag for mortgage lenders. Here are some of the strategies you can use to secure a self-employed mortgage.

Prepare documents supporting your business income

Showing your mortgage lender that you have a sufficient and steady income is standard for any mortgage application. However, since self-employed borrowers present a more significant risk, they are under higher scrutiny.

W-2 employees can often get away with minimal documentary evidence, such as pay stubs, since their income is regular and easy to verify. However, self-employed individuals must demonstrate that their business produces sufficient and stable income to meet their mortgage obligations in the long term. The documents you may need to provide include the following:

1. Self-employment history, supported by tax return

You should collect at least two years of self-employment history showing a stable or increasing income, supported by tax history (business tax returns and/or personal income tax returns.) Self-employed individuals often face an additional obstacle since they typically write off their business expenses, which can affect their tax burden and earnings. However, keep in mind that underwriters only consider taxable income. Therefore, if you plan to buy a house while self-employed, it is best to limit how much you write off. Besides, since independently earned income can vary widely from year to year and underwriters tend to adopt a conservative approach when verifying income, a longer self-employment history will also support your application. However, some mortgage lenders may consider would-be borrowers with a self-employment history shorter than two years if they can show W-2s from an employer in the same field.

2. Proof of employment

Proof of employment, such as letters from clients or a licensed CPA, year-to-date profits and loss statement, etc.

3. Documents proving that your business actually exists

You should also collect any documents proving the existence of your business, such as a DBA issued at least two years prior, evidence of worker’s compensation, or a business license from the state in which you are practicing. A membership letter from a professional organization or liability insurance policy might also help.

4. Proof of financial assets and other sources of income

In addition to your business income, the mortgage lender may request to see proof of additional assets (savings accounts, investment accounts, etc.). They might also ask for any other source of income (alimony, Social Security, etc.) that could help prove that your financial situation is stable enough to assume your mortgage and other obligations.

Since each business varies in nature, the mortgage lender may require additional documentation while considering your application. Make sure that your affairs are in order before starting the mortgage process to speed up the procedure. Keeping your business expenses separate from your personal accounts can also make things easier.

Shop around for the right mortgage and lender

Not all mortgage lenders consider self-employed borrowers the same way. Be patient and shop around to find a mortgage institution willing to evaluate your case, especially if your application is atypical. If you are feeling overwhelmed, you may want to consider hiring the help of a mortgage broker, preferably one demonstrating a good track record with self-employed applicants since they have established professional relationships with lenders. Mortgage loans for self-employed individuals include both government-backed loans and conventional loans. You may also qualify for some homebuying assistance programs sponsored by your state or local governments, especially if you are a first-time homebuyer.

Increase your credit score

A good or excellent credit score is key for anyone seeking to apply for a mortgage, self-employed or not. It will help you secure better interest rates and increase your approval chances. However, since your credit score is a sign of whether you have a good track record of paying back your debts, it is even more critical for individuals who lack steady income and need to demonstrate that they are lower-risk borrowers. Being self-employed typically does not affect your credit score unless you took out a personal loan or line of credit to kick start your business.

Increase your down payment

A smaller mortgage will also help since it doesn’t affect your debt-to-income ratio as much. Besides, lending institutions prefer applicants with higher equity in their homes since they are less likely to default on their mortgage if they encounter financial difficulties. Finally, bigger down payments equivalent to 20% or more of the purchase price eliminate the need for private mortgage insurance. Therefore, your mortgage is more likely to get approved since your monthly payments will be lower.  

Reduce your debt

Your debt-to-income ratio is one of the most important elements the underwriters will take into account when evaluating your mortgage application. You should pay off as much debt as you can before you start applying for mortgages to free some room in your budget for your mortgage payments. Besides, reducing your DTI also increases your credit score. Before applying for a mortgage, you should also avoid taking on more debt (such as credit cards, car payments, etc.). As a rule of thumb, your DTI should be below 43% to be manageable.

Show proof of cash reserves

One of the major downsides of self-employment is the lack of regular income. In some industries, seasonal peaks – and dry periods – are the norm. Therefore, underwriters prefer to see that you have enough cash to cover your mortgage obligations even during the months you are not earning as much or if your business takes a nosedive. Having some money set aside as an emergency fund can also help cover some of the expenses inherent to being a homeowner, such as property taxes, unexpected repairs, regular maintenance, and so on.

Find a co-signer or co-borrower

Sometimes, you may not qualify for a self-employed mortgage alone, and you may need to bring in an additional person on the loan. If your significant other or spouse has a good credit score and is a W-2, you may want to co-own the property by applying for a joint mortgage. You can also ask a parent or relative who would be willing to assume the responsibility of the loan if you were to default on your payment to co-sign your mortgage.

Use a bank statement loan

Suppose your income does not allow you to qualify for a traditional mortgage because you write off as many deductions as you can or because your self-employment history is too short. In that case, you may still be eligible for a bank statement loan. Instead of taxable income, underwriters will examine your net income after taxes and business expenses over the past 12 to 24 months rather than income tax returns. Keep in mind that this type of loan often comes with higher interest rates and down payment requirements since they are riskier for the mortgage lender. Besides, they may lack some consumer protections offered in most major loan programs.

Alix Barnaud

After graduating with a Master’s degree in marketing from Sciences Po Paris and a career as a real estate appraiser, Alix Barnaud renewed her lifelong passion for writing. She is a content writer and copywriter specializing in real estate and finds endless fascination in the connection between real estate, economic trends, and social changes. In her free time, she enjoys hiking, yoga, and traveling.