How to get a mortgage when you’re self-employed
Key takeaways
- It’s possible to get approved for a home loan as a self-employed borrower, but you often have to take a few extra steps to prove your creditworthiness.
- To boost your chances, consider non-conforming or non-qualifying loans or mortgage brokers who specialize in the self-employed.
- Other strategies include making a larger down payment, raising your credit score and lowering your debts.
If you run your own business — or are a gig worker, freelancer or independent contractor — financing a home could prove challenging. One of the first things lenders look for is a steady, verifiable income. Without a regular paycheck or W-2 statement, it can be harder to prove how much you make and how reliably you make it. But working for yourself doesn’t guarantee you’ll have a hard time getting a mortgage. Here’s what to know about getting approved for a home loan when you’re self-employed.
Can you qualify for a mortgage while self-employed?
Yes, it is possible to qualify for a mortgage while self-employed.
It’s a common misconception that it’s always more difficult for self-employed applicants to get a loan than regular salaried or hourly workers with a W-2, says Paul Buege, operations officer at Guild Mortgage in Menomonee Falls, Wisconsin.
“In all cases,” Buege says, “the basic criteria to get approved are the same: You need to have a good credit history, sufficient liquid available assets and a history of stable employment.”
Challenges can crop up, however, when you’re self-employed and buying a house if you’ve only been working for yourself for a short time or make less money than lenders prefer — even if it’s just on paper.
“Self-employed individuals often take full advantage of the legal tax deductions and write-offs that are allowed by the IRS. Unfortunately, this means that they often show a low net income — or even a loss — on their tax returns,” says Eric Jeanette, CEO of Dream Home Financing, based in Adelphia, New Jersey. “That can make it tougher to qualify for a mortgage.”
Complicating matters is that the rules for self-employed applicants can vary depending on the lender or loan type.
“This makes the process confusing, especially if you are shopping around and applying with multiple lenders,” says Anna DeSimone, a New York City-based personal finance expert and author of “Housing Finance 2020.” Often, “it lengthens the time you may have to spend trying to get approved for a loan.”
4 steps to get a mortgage when you’re self-employed
If you’re self-employed, the loan approval process is similar to that of a W-2 salaried applicant: You’ll need certain documentation to verify your income and prove to the lender that you’re creditworthy.
1. Determine if you’re classified as self-employed
If a large portion of your earned income is verified by 1099 forms, rather than W-2s, you’re likely to be considered self-employed. The same goes if your return includes Schedule C, which is used “to report income or loss from a business you operated or a profession you practiced as a sole proprietor,” to quote the IRS.
Here are other factors that qualify you as self-employed:
- You run a business as a sole proprietor or independent contractor.
- You are part of a partnership that runs a trade or a business.
- You are a gig worker or run a part-time business that accounts for most of your income.
Even when you have a second, part-time job with a W-2, a lender will likely place more weight on your own gig — if it’s your primary income source.
2. Gather necessary documents to show lenders
Your lender will need proof of income, just like they would for a salaried employee. It’s just that you may have to jump through more hoops to provide that proof. “Since self-employed people have non-traditional income structures, they may be required to show additional income documents when applying for the mortgage,” says Alan Rosenbaum, founder and CEO of GuardHill Financial Corp. in New York City.
The sort of documents you might need include:
Employment verification
- A copy of your business license
- Proof of business insurance (if applicable)
- Articles of incorporation, LLC or partnership (if applicable)
- State or federal permits
Income documentation
- Two years of federal income tax returns (personal and business)
- Recent business bank statements and profit-and-loss reports (income statements)
- An itemized list of unpaid accounts receivable
3. Prepare a pitch that explains your business
Depending on the nature of your work, your problem may not be so much the amount of your income as its reliability.
Providing the lender with any of these items can help show you’ll be able to make those monthly mortgage payments:
- Description of the services you provide and your experience, including certifications
- Your professional website
- Data showing the health of the industry and demand for your services
- Tax returns from previous years, especially if they show growth in revenue over time
- Explanations of any revenue gaps
- Ongoing contracts you have with clients, especially if you’re on retainer
- A business plan, if you have one
4. Shop multiple lenders
Shopping around among different lenders and programs can help you find the best fit. Focus on lenders that do business with independent contractors or sole proprietors.
“Work with an experienced loan officer who understands self-employed business records and documentation,” Buege says. “This person can help you present your business earnings and liabilities in a clear and understandable way that facilitates the approval process.”
FHA loans may also be a better fit than traditional loans because they are guaranteed by the government and lessen the lender’s risk.
A skilled mortgage broker can steer you toward lenders who specialize in self-employment mortgages.
Loan types to consider when you’re self-employed
Self-employed borrowers are eligible for virtually all the same mortgage types available to others. That means you can qualify for a conventional loan from a private lender or a government-backed loan.
Here’s a closer look at each:
- Fannie Mae and Freddie Mac mortgages: These are traditional conforming loans that require a minimum 3 percent down payment and have fairly strict approval requirements. It’s possible to get approved if you’re self-employed, but you may have more success after several years in business.
- FHA mortgage: FHA loans are guaranteed by the Federal Housing Administration and require a 3.5 percent down payment for most homebuyers.
- VA mortgage: VA loans are available to qualifying active-duty service members, veterans and surviving spouses. These loans can guarantee up to 100 percent of the loan, which means you may not need to make a down payment.
- Non-qualified mortgage lenders: A non-qualified mortgage (non-QM mortgage for short) is a type of non-conforming loan, one in which there are looser income verification criteria. Instead of using standard federal qualifications to assess your creditworthiness, the lender bases approval on alternatives — like your average bank statement balance over the last 12 to 24 months.
Is a non-qualified loan the same as a non-conforming loan?
How to improve your chances of getting a mortgage when you’re self-employed
There are several ways to boost your odds of getting approved for a mortgage as a self-employed borrower.
Boost your credit score
Focus on improving your credit score. This requires making bill payments on time, paying down debt, correcting any errors on your credit reports and sticking to the limits on your revolving credit accounts.
Lower your debt-to-income ratio
You can increase your odds of approval by lowering your debt-to-income (DTI) ratio to 43 percent or less. This requires avoiding new debt, paying off your existing debt faster than scheduled or earning extra money.
Make a larger down payment
Forking over a higher down payment than the minimum needed can help, too. “Down payment requirements for a bank statement loan were as low as 10 percent before COVID-19 hit,” says Jeanette. “But now, many lenders require 20 percent or more.”
Find a co-signer or co-borrower
If your self-employment income is insufficient, having a co-signer or a co-borrower can help you qualify for a mortgage or even a larger loan amount. That’s because the lender will also take their income and credit into account.
It’s important to note that co-signers are slightly different from co-borrowers. Both take on the debt as their own, as do you. However, a co-borrower becomes a joint owner on the title, while a co-signer does not.
Can you get a mortgage loan if you’ve been self-employed for less than two years?
The short answer is yes, you can get a mortgage loan with less than two years of self-employment history — but because lenders typically want to see at least two years of self-employment before they give you a mortgage, you may need to provide extra reassurance.
For example, if you’ve become self-employed in an industry where you’ve previously worked, you can show continuity of career, even if you’ve been self-employed for less than two years. And keep in mind that your income isn’t the only factor lenders use to determine eligibility. Having a strong credit score and little debt can help boost your application, too.
What if I don’t qualify for a mortgage?
If you don’t get approved for a traditional mortgage, you can try applying for a non-conforming loan. “But these often come at a higher cost to the consumer, and not everyone can qualify,” says Buege, who adds that non-conforming loans can charge a higher interest rate and closing costs and impose less favorable repayment terms.
If you’re trying to refinance and get denied, you could try applying for a home equity loan or home equity line of credit (HELOC) if you’ve built up enough equity in your property and meet the qualifications.
