How to Get a Mortgage When Self-Employed

Being self-employed gives you the freedom and flexibility to work as much as you want, to travel, and to take vacations on your own schedule rather than your employer’s. However, it can also make it more difficult to get a mortgage.

Let’s look at the challenges of mortgage financing for self-employed people and how you can meet those challenges successfully.

Challenges of Getting a Self-Employed Home Mortgage

Lenders have more requirements for a self-employed mortgage than for a W-2 borrower. One reason is that income for a self-employed person tends to be less stable and more difficult to verify.

Lenders also take a close look at both your business income and your business expenses, focusing on how much is left over as net income. Your business’s debt also plays a role in the approval process. With W-2 borrowers, lenders are only concerned with your gross income and your debt.

Because of the additional figures they need to verify, lenders will ask self-employed people for more documentation than people who have other types of work.

How to Apply for a Mortgage When Self-Employed

Planning ahead and staying well-organized is the key to making a successful application for a mortgage if self-employed. Here are our top tips for a solid application:

Determine If You Are Self-Employed

Check to make sure you fit the IRS definition for self-employment before you apply for a self-employed home mortgage. Generally, you’re considered self-employed if you:

• Operate a business or trade as a sole proprietor or independent contractor.
• Are a member of a partnership.
• Are in business for yourself in another way, such as freelancing or gig work.

If you work part-time as a W-2 employee and also earn self-employment income, lenders will usually consider both income sources, but they’ll evaluate them separately using both your pay stubs from your employer and your self-employment income documentation. If your side business is new or the income from it is inconsistent, lenders may only count the W-2 income.

Your lender may ask for proof of your self-employment status before starting the self-employed mortgage approval process. This might include:

• A statement from a CPA verifying your business and income.
• Copies of contracts you have with clients or invoices you’ve sent them.
• Business license or incorporation documents.
• Proof of business insurance.

Round up Your Tax Returns and Other Documentation

Your lender will want to see at least two years of federal tax returns for both your business and your personal income. You can provide additional returns if the trend paints a positive picture, but lenders average your income over returns, and low-earning years could pull that average down.

Other documentation to prove your business income might include:

• Profit and loss statements
• Bank statements (personal and business)
• 1099s or client invoices

How to Get a Mortgage When Self-Employed

Having all the right documentation doesn’t necessarily mean your self-employed mortgage will get approved. Here are the ways you can improve your chances of getting the mortgage you want:

Establish a Solid Self-Employment Track Record

Lenders prefer two years of self-employment or more to show that you’ve been able to make a go of it running your own business and that your income is reliable. The longer you’ve been successfully self-employed, the better.

Pay Down Debt

Just like a personal mortgage, lenders use your debt-to-income ratio to evaluate a self-employed mortgage. The more you can pay down your debt, the better your chances are of getting your mortgage approved. Debt includes personal loans, lines of credit, credit cards, and car loans.

Improve Your Credit Score

Having a good credit score signals to lenders that you are a solid credit risk. A credit score of 700 or higher is optimal, but if your credit score is lower, you may still be able to find a lender willing to work with you.

To raise your credit score, pay all your bills on time, keep your credit card balances low, and avoid taking on new debt, such as new loans or additional credit cards, during the application process

Save for a Larger Down Payment

Similar to a mortgage for a W-2 employee, having a minimum 20% down payment makes a loan less risky for the lender. A higher down payment can also help you avoid private mortgage insurance (PMI).

Build Up Your Cash Reserves

Having money in the bank or assets that are easy to liquidate gives lenders confidence that you will make your mortgage payments on time. It also shows that you can handle income fluctuations; although these can be unexpected, they’re more common for self-employed people.

Finding the Right Lender

Now that there are so many self-employed people, most lenders are comfortable working with them for self-employed home mortgages. You shouldn’t have trouble finding a lender who understands the requirements of these types of mortgages and the ins and outs of approving them. If you do have trouble finding a suitable lender, consider working with a mortgage broker who can help you organize your paperwork and find alternative lenders.

Getting a Mortgage When Self-Employed

Getting a self-employed mortgage takes more effort and requires more paperwork, but it’s doable. You need to be organized and proactive, and you may need to wait until you have a stronger application before going into the process.

If you still have questions about self-employed mortgage options, contact a local REMAX agent to help you understand your financing options and connect you to other local professionals who may be able to offer their expertise.