How to Get a Mortgage When You’re Self-Employed
If you are a self-employed business owner or contractor looking to buy a home, it can be a bit disorienting. Knowing what to expect and how to prepare and apply for a self-employed mortgage will help you find the best home loan for you.
Here, we will discuss how to get a self-employed mortgage, as well as what mortgage lenders for the self-employed are looking for. By the end, you’ll know what documentation you’ll need, what type of self-employed mortgage loan will be the best fit, and how to present yourself as an ideal candidate to potential lenders.
Recommended: Giniel Financial Group specializes in helping self-employed business owners get the best mortgage.
Get a Self-Employed Mortgage
In this self-employed mortgage guide, we’ll be exploring the ways small business owners can improve their prospects of getting a mortgage. This process can be slightly more difficult but not impossible.
Some lenders don’t view the self-employed as solvent borrowers, as it’s more difficult to prove dependable income. Where owning your own business may save you money on taxes, deducting business expenses often reflects a lower annual income. This makes it harder to use your business finances to prove you have the money to afford regular home loan payments.
A large down payment and a good credit score can make it easier to obtain a self-employed mortgage; however, many self-employed individuals have gotten a loan with a downpayment as little as 3.5%. Here, we will provide you with tips, suggest loan types, and a list of all the paperwork you’ll need to have in order to successfully obtain a mortgage as a self-employed individual.
What Self-Employed Mortgage Lenders Look For
Brokers willing to work with self-employed business owners will want proof of income stability as well as the financial security and ability of your business to continue to provide sufficient income.
There are several different ways to prove your business is a success to potential lenders. Making sure you have the proper documentation is crucial for the entire process of getting a self-employed mortgage.
What Documentation You’ll Need to Provide
Any potential broker will be looking for you to provide extensive documentation of your business income. Often, the requirement is to bring at least two years of self-employment documentation. Use our table below for quick reference before diving deeper.
| Two years of federal tax forms | Permission to view your credit report | 60 days of account statements |
| Most recent W-2s and pay stubs | Documentation of extenuating circumstances to damaged credit | Statements from retirement or investment accounts |
| 1099 forms (if self-employed) | Documents for the sale of any assets | |
| Divorce decrees or child support decisions | Verification of gift funds deposited into your account | |
| Six months of legal documentation of alimony or child support received |
Employment Verification
Lenders will require proof that you’re self-employed. To do this, you can include emails or letters from:
- Current clients
- A licensed certified public accountant (CPA)
You can also provide any or all of the following:
- Any state or business license that you hold
- Proof of business insurance
- A “doing business as” (DBA) name registration
Income Documentation
Having proof of steady and reliable income is one of the best ways to present yourself as an ideal candidate for mortgage approval. Your lender wants to make sure you’re making consistent money now and see evidence indicating you’ll be stable well into the future.
Be prepared for your lender to ask for the following:
- Personal tax returns
- Corporate tax returns for S and C corporations
- Profit and loss statements (Schedule C, Form 1120-S, or Schedule K-1)
- Monthly or quarterly bank statements (Personal and Business Accounts)
- List of assets (savings accounts, investment accounts, etc.)
- Additional sources of income (alimony, child support, Social Security, etc.)
- Employment verification
- Proof of current rent or mortgage payments
The common threshold for this is to have documentation for at least the past two years. Even if you haven’t been self-employed for two years, you can still get a mortgage.
However, lenders typically look for two years of business history and stability. There are non-QM loans available for homebuyers who cannot meet this two year requirement. These loans are based on your credit score and assets in the bank, but they typically require you to have a 30% downpayment and their rate to obtain tends to be 3%-4% higher than a typical loan. We recommend you begin planning early and speak with your lender to find the best option for your individual circumstance.
Mortgages for the Self-Employed
Being self-employed might make it harder to qualify for a conventional mortgage. However, there are other loans available for small business owners.
FHA Loan
Insured by the Federal Housing Administration (FHA), these loans are issued by FHA-approved lenders and are often geared toward borrowers with low-to-moderate income. FHA loans typically require a small down payment and allow lower credit scores.
Since FHA loans are federally insured, this provides an added layer of protection to lenders should you default on your mortgage. This also means FHA lenders can offer better terms and lower interest rates.
With an FHA loan, you typically need to pay higher mortgage insurance premiums, but the higher cost of insurance tends to be offset by the FHA loan’s favorable interest rate.
Bank Statement Loan
A bank statement loan, or alternative document loan, lets you apply for a mortgage without submitting the more traditional paperwork to prove income. Instead of tax returns or a W-2, you will instead provide two years of bank statements to help your lender evaluate your income.
These loans do come with higher interest rates, as the lender is taking a bigger risk when only using this type of documentation.
Joint Mortgage
Should you have a partner, spouse, or trusted friend who is a W-2 employee, you could enlist them to be a co-borrower. Having a co-borrower with consistent employment will greatly improve your chances of getting approved for a mortgage.
This co-borrower assures your lender there’s income coming into your household that’s not dependent on the success of your business. Keep in mind that your co-borrower will need to have a good credit score to qualify with you.
Tips for Getting a Self-Employed Mortgage
As a business owner looking to buy a home, you want your loan application and financial status to look their best to lenders. Below, we will discuss what you can do to improve your chances of getting a self-employed mortgage.
Optimize Your Debt-to-Income Ratio
Your debt-to-income (DTI) ratio is the percentage of your monthly income that goes toward paying debts. This plays a major factor in how likely a lender is to offer you a loan.
To calculate your DTI, simply divide your monthly recurring debt by your monthly income (before taxes). Don’t include utility bills, taxes, groceries, or other common purchases in this equation, just your debt. For a salaried employee, monthly income is easy to determine. Meanwhile, a self-employed borrower would base this number off their Schedule C or corporate returns.
Lenders are looking for you to keep your DTI below 45%. Should your calculations show that your DTI is above this, it’s time to focus on reducing your debt and increasing your income.
Business Debt vs Personal Debt
Note that this number only factors in personal debts, not the debts of your business. In general, all business owners should separate their personal finances from their business finances. Business lines of credit and business credit cards do not show up on your personal credit report.
If large purchases are made for the business, be sure to have the business buy them and the owner can personally guarantee the loan, but as long as the business does not default on the loan, this loan will not impact the personal credit of the owner who guaranteed it. This nuance is important because having less personal credit will lower your DTI.
Recommended: In order to protect your personal assets, all business owners should separate their personal finances from their business finances. To learn more, check out our article about piercing the corporate veil.
Establish a Self-Employment Track Record
Keeping business and financial records is not just good business sense but will also help you when trying to get a mortgage. Lenders are more willing to work with business owners with at least two years of self-employment history, documented tax records, and proof of stable or increasing income.
If you’re an LLC owner, you’ll already be keeping your business and personal expenses separate. Regardless of your business structure, keeping your business expenses on business credit cards or on your business account is advised. Not only is this a recommended practice, but it’ll also look more favorable on your application.
Optimize Your Credit Score
Good credit goes a long way with any type of banking and borrowing. Having an above-average credit score will help make you more attractive to lenders, help with pre-approval, and help you get a lower interest rate.
Be prepared to give your lender permission to look through your credit history. Lenders use this to see what sort of financial habits you have. If you have made a bad financial decision in the past, show up with documentation explaining why the situation happened and why it’s not a pattern of behavior.
Start Saving for a Down Payment
A down payment can range anywhere from 3.5% and up plus closing cost. It’s recommended to start saving early and often. The larger the down payment you can provide, the more likely lenders will be to work with you.
Having a large portion of funds saved up outside your down payment lets your future lender know that you have a safety net should your business fall into financial trouble. A robust savings account for emergencies, property taxes, homeowners insurance, and any surprise repairs is very attractive to potential lenders.
Moving Forward
Now that you know what you’ll need to get a great self-employed mortgage, it’s time to find your dream home. Be sure to gather all your proper documentation, optimize your DTI and credit score, and find the best mortgage lender for you.
Frequently Asked Questions
Yes, small business owners and the self-employed can get a mortgage. The difference is you’ll have to prove two years of income history and include a bit more paperwork.
It can be, but it depends on the lender. If you get organized ahead of time and show up with all the proper documentation, the process should still be fairly straightforward. Just make sure you’re working with a lender who works with the self-employed, like Giniel Financial.
The more, the better, but the bare minimum is about two years of self-employment income history.
Not usually. It helps to research and compare loan estimates to ensure you’re getting the best deal possible. But just because you’re self-employed does not mean your mortgage will be more expensive.
