A self-employed mortgage works the same as any other home loan. The key to qualifying is carefully documenting your income and working with a loan officer who knows how to help self-employed folks.
If you’re a freelancer, gig worker, or a business owner hoping to buy a home, a self-employed mortgage may be in your future.
No, there aren’t mortgages exclusive to the self-employed, but qualifying can be a little more complex than for someone who is an employee. Not to worry, though. We’ll give you the inside scoop on how to qualify for a mortgage if you’re self-employed.
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You can definitely get a self-employed mortgage. That goes for business owners, freelancers, independent contractors and gig workers. The type of work you do has no bearing on whether you can get a home loan. It’s your income that makes all the difference.
In order to approve a homebuyer for a loan, mortgage lenders must verify that they earn sufficient income to afford their monthly mortgage payments.
If you’re an employee, you can prove that you have a stable income by providing your pay stubs and tax returns.
Self-employed folks can seem risky or complex because their income may be variable. Perhaps you’re a freelancer and your workload — and therefore your earnings — fluctuate month to month. To prove that you can afford your mortgage, your lender will need to see two years of tax returns showing that your annual income level has been consistent, with no major drops or red flags.
Here’s the thing about tax returns for the self-employed, though. They don’t always show the homebuyer’s true income. As a self-employed person, you may claim a number of business expenses that reduce the amount of tax you owe, but which also reduce your amount of documented income. Therefore, a lender may not approve you for as much as you can actually afford because they can’t verify that information.
But that doesn’t mean getting a self-employed mortgage is impossible. Quite the opposite is true. Here’s what you need to know about the process.
The borrower criteria and mortgage application process are the same for employees and self-employed homebuyers. Your lender will review your income, credit and debt-to-income ratio† (DTI) to determine whether you qualify for a home loan. You’ll also need to show that you have enough money available to cover your down payment and closing costs.
However, self-employed borrowers may be required to provide additional documentation to prove their income.
You may be asked to submit:
● Two years of personal tax returns
● Two years of business tax returns
● Bank statements
● Profit and loss statement
● Balance sheet
● List of personal assets
● List of business assets
● Additional sources of income (Social Security, alimony, dividend payments, etc.)
Your lender may also request letters or attestations from clients verifying that you have ongoing contracts. They can also ask to see your business license or a statement from your accountant regarding your finances.
While all of this might seem like a hassle, know that not all self-employed borrowers are asked to provide all of the documents listed above.
Additionally, the longer you have worked for yourself, the easier it often is to qualify for a mortgage. That’s because your business has an established track record, and you can provide ample evidence of consistent income.
If you’ve been a gig worker, contractor or self-employed for less than two years, you may have a hard time qualifying for a traditional mortgage. However, you may be eligible for a bank statement loan, so it’s still worth applying and talking to a lender about your options.
Speaking of lenders, it’s critical that you work with a lender that offers self-employed mortgages and understands the nuances of qualifying.
Laura B. Mead, a senior mortgage planner with Fairway in Orlando, Florida, says, “I love helping self-employed borrowers with their mortgages and really digging into their tax returns to help them qualify.”
Mead works closely with her self-employed clients’ certified public accountants (CPAs) to obtain the necessary documents and work through the details that can make or break their loans.
She recalled working with a client who had recently purchased a building and display materials to set up a showroom.
“On his taxes, it looked like he had a loss year. By conferring with the client and his CPA, I was able to ascertain that the deduction for the building and display materials was not a true loss, but a one-time acquisition cost that the borrower could deduct,” Mead says. “I obtained an additional year of taxes, so three years total, had the accountant clarify the expense in a letter, and the borrower was approved.”
Had Mead simply disregarded the borrower based on an initial look at his taxes, he would not have been able to buy his home. That’s why it’s important to confirm that a lender offers self-employed mortgage options and that they have experience getting them to closing.
“There are so many options for self-employed borrowers to be able to get a mortgage,” adds Katie White, a Fairway branch manager in Austin, Texas. “We have had many opportunities where our clients were declined by three other lenders due to being self-employed and not having enough income and we were able to close them and get them in their dream home just by being extra knowledgeable on what can and cannot be used for income.”
Working with the right lender is crucial as a self-employed borrower. In fact, it could make or break your homebuying experience.
Connect with a self-employed mortgage lender here.
Submitting tax returns is a standard part of the mortgage process, but self-employed borrowers need to be especially strategic about them.
Freelancers, independent contractors, and business owners often have the option of writing off certain business expenses for tax deductions. However, claiming every deduction allowed will lower their self-employment income on their tax returns, and that can cause them to be denied a loan or to be approved for less money than they need to buy their ideal home.
Mead’s advice is this: “Don’t write off every little thing on your taxes! The net after-expense number is usually what is considered for qualifying income. Let your CPA know you would like to become a homeowner, and whenever possible, connect your CPA with your lender. These financial professionals will be able to guide you through the process.”
If your CPA knows you plan to buy a home, they can help you determine which deductions to take to optimize your return for mortgage loan approval.
Communication is essential, especially if you’ve had a unique tax year. “If you have had some large one-time expenses for your business that show as deductions to income on your taxes, be sure to let your loan officer know this,” Mead advises.
Without that information, they may not be able to verify the full extent of your business income and may not be able to approve you for the loan.
And if you’ve had recent income fluctuations, your lender may need more tax data.
“If you have had a ‘bad’ income year and a ‘good’ income year, your loan officer may need to review three years of tax returns,” Mead says.
How many years do you have to be self-employed to get a mortgage?
Generally speaking, you will need to have two years of tax returns proving your self-employment income to qualify for a Conventional or government mortgage loan. If you’ve been self-employed for less than two years, you may qualify for a bank statement loan.
Is it hard to get a mortgage if you’re self-employed?
No. Self-employed borrowers must meet the same criteria as those who are employees. But they may be required to provide additional income verification, such as two years of business and personal tax returns, profit and loss statements and other proof of ongoing income.
Are mortgage rates higher for self-employed borrowers?
Interest rates are highly dependent on each borrower’s individual profile. A self-employed homebuyer who has an excellent credit score, low debt-to-income ratio, and significant savings for a down payment may qualify for a competitive rate. Typically, borrowers who have higher risk profiles — often meaning lower credit scores, lower down payments and higher DTIs — receive higher interest rates.
Self-employed homebuyers can qualify for the same loans as employees. However, they may need to provide more documentation since their income and tax returns may be more complex. The key to qualifying for a self-employed mortgage is to work with a lender that has experience helping self-employed individuals qualify and purchase homes.
†Debt-to-income (DTI) ratio ismonthly debt/expenses divided by gross monthly income.
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