How to Get a Mortgage When You’re Self-Employed: Complete Guide

Are you a freelancer or business owner hoping to buy a house? You are not alone; approximately 16.2 million self-employed individuals in the United States account for over 10% of the workforce. However, you may wonder how to get a mortgage when self-employed. The first thing lenders look for is a steady, verifiable paycheck. If you’re an independent contractor or run your own business, proving how reliable you are and how much you make can complicate the process. 

Many find it doable with the right approach and a bit of knowledge. Let’s walk you through practical tips to help you achieve your homeownership goals.

Key Takeaways

• Mortgage companies look closely at your finances, credit scores, income stability, and financial health.
• Self-employed mortgages require more documentation than the traditional ones to prove your creditworthiness.
• Consider alternatives like making a large down payment or having a co-signer to strengthen your application.
• Understanding how to lower your mortgage payments can save you money in the long run.

Step-by-Step Guide to Getting a Mortgage When Self-Employed

Are you sure you are self-employed? Surprisingly, some people think they are but aren’t. Generally, you’re considered self-employed if you own more than 25% of a business or are freelancers. 

If that sounds like you, follow these steps to apply for a self-employed mortgage loan.

1. Find Out if You Meet the Mortgage Requirements as Self-Employed

When you apply for a loan, your credit score temporarily suffers. That’s why it is recommended that you make sure you qualify for the funding before you request it. 

Criteria for Qualification

Typically, a financial institution will want you to meet the following requirements:

• You’re considered self-employed by the IRS
• You need to have been in business for at least two years.
• You need to be able to verify your income in detailed records, including profit and loss statements, tax returns, and bank statements.
• You should have a good credit score, preferably above 620.
• It helps to have additional assets or savings.
• You will likely need to be at least 18 and have a U.S. address.

Those are some basic requirements. Unfortunately, most companies require you to jump through other hoops before prequalification.

2. Gather Necessary Documentation

Lenders require specific documentation to verify your financial stability and creditworthiness when applying for a self-employed mortgage. Here’s what you’ll typically need:

• Personal and business tax returns for the last two years
• Profit and loss statements prepared by a certified accountant
• Personal and business bank statements demonstrating your cash flow and savings
• Your business licenses

3. Determine Your Income: Gross vs. Net

A common question is whether mortgage lenders use gross or net income for self-employed mortgage applications. Most lenders will use net income to assess your eligibility, which is the amount you earn after deducting all your expenses, including taxes. However, if your business has significant tax deductions, lenders might also consider your gross income.

Heads up! Lenders will thoroughly analyze all the financials before giving a home loan to a self-employed person. So, be prepared to have a solid explanation for any significant discrepancies between your gross and net income.

4. Check Your Credit Score

Your credit score plays a role in getting your mortgage approved. Higher credit scores often mean better loan terms and lower interest rates. Lenders view a high credit score as a sign of financial reliability. So, make sure you check and improve your credit score before applying.

You can visit AnnualCreditReport.com for free to check your credit score once a year. If your score is below 620, pay your bills on time and reduce your debt. Lowering your credit card balances can significantly boost your score.

5. Understand Mortgage Terms and Interest Rates

This one’s tricky! Interest rates can be the “make it or break it” deal when applying for a self-employed mortgage loan. Mortgage terms and interest rates can highly impact your monthly payments and the total amount you pay over the life of the loan. So, it is essential to understand what interest rates are.

There are two types of mortgage interest rates: fixed and Variable. With a fixed-rate mortgage, your interest rate remains the same throughout the loan term. A variable-rate mortgage changes based on market conditions, which can affect your payments and the amount due.

There are also Adjustable-Rate Mortgages (ARMs) with a fixed interest rate initially, followed by annual adjustments. 

Regardless of your option, look for ways to lower your mortgage payment.

6. Explore Different Self-Employed Mortgage Lenders

Explore all your options before committing to one. Offers and qualification criteria may vary from one lender to the other. So, if the offers do not match your needs, don’t lose hope and give up on your dream home. Keep searching. Even if you find a good deal, there might be a better one. Research and compare different options to find the best fit.

In order not to limit yourself, make sure you check these options:

1. Traditional banks can be demanding and often have strict requirements, but they may also offer competitive rates.
2. Online lenders may offer more flexibility and faster approval processes. However, be wary of scams and never transfer any fees before you have enough proof of their legitimacy.
3. Mortgage brokers can help navigate you through the process if you have questions.

Things to Consider While Applying for a Self-Employed Mortgage Loan

Here are four things to consider when applying for a self-employed mortgage loan.

Find a Co-Signer

Having a co-signer can strengthen your application if your credit score or financial situation isn’t the best. A co-signer with a strong credit history and a stable income can increase your chances of approval, but they likely will not help you get better rates.

Make a Larger Down Payment

A larger down payment reduces the lender’s risk and the amount you need to borrow, improving your chances of securing a mortgage. You may also end up with a lower interest rate.

For a conventional self-employed home loan, putting down at least 20% of the home’s purchase price can help you avoid Private Mortgage Insurance (PMI).

Maintain Detailed Financial Records

It’s easier to handle your budget when you keep detailed financial records. Consider investing in some top-notch financial software to keep everything in order. 

Consider Alternative Income Verification

Some documentation, like tax returns, might be challenging to provide when applying for a self-employed mortgage loan. In this case, some lenders offer alternative options, such as leveraging your assets to qualify you for a mortgage or using your bank statements instead of tax return records.

However, loans verified this way may have higher interest rates and require larger down payments.

Mortgages for self-employed applicants might seem a little complex, but it’s all about understanding what lenders look for and being prepared. By keeping solid financial records and a good credit score, you’ll be well on your way to securing a home loan.

Remember, the process might take longer and require more paperwork, but the key is to present a clear and stable picture of your finances.

Good luck on your home-buying journey!

FAQ

Still have questions? Here is some further clarification.

How Do I Qualify for a Mortgage if I Am Self-Employed?

To qualify for a self-employed mortgage, you must provide proof of sufficient income and stability and maintain a good credit score. To assess your eligibility, lenders will review your financial documentation, such as tax returns and profit and loss statements.

Is It Harder to Get a Home Loan Being Self-Employed?

Yes, getting a mortgage when self-employed can be challenging compared to applying as a traditional employee. Due to income variability, lenders view self-employment as a higher risk. However, with a robust financial profile, solid documentation, and a reasonable down payment, you may still secure a mortgage for your dream home.

What Is Proof of Income for a Self-Employed Mortgage?

Proof of income for a self-employed mortgage typically includes:

• Personal and business tax returns for the last two years
• Profit and loss statements prepared by a certified accountant
• Personal and business bank statements demonstrating your cash flow and savings