How To Get A Mortgage When Self-Employed (2024)

Getting a mortgage when self-employed can often be harder to accomplish than if you were simply an employee of a company. It requires more paperwork preparation, constant attention to detail and being realistic about your income and what you can afford.

To make a better housing choice in the long term, it can also require a massive amount of patience, particularly during a hot housing market.

How to Qualify for a Mortgage When Self-employed

There are two words that often flash in the minds of loan officers when a self-employed individual applies for a mortgage: high risk. There’s a stereotype that self-employed borrowers have less predictable income when compared to the stability afforded by salaried employment. Because of this, self-employed mortgage applicants usually have to meet a higher threshold of lender requirements to secure a mortgage loan. But, it is not impossible.

Here are several ways to help you get prepared before applying for a mortgage.

1. Assess Your Business and Personal Finances

Before you begin shopping around for a mortgage, it is crucial to take stock of your business and personal finances. And it’s important to keep track of whether you have filed personal versus business income separately, or together, to help the lender and yourself during the mortgage application process. Simply put, make sure your sources of income are documented.

When considering a mortgage application from a self-employed borrower, the bank will not only evaluate your financial health but the state of the business (likely your main source of income) as well. Here are some questions to ask yourself:

• How large are your existing business and personal debt obligations?
• Does your business earn enough income on a regular basis to easily cover potential mortgage payments and other debt payments?
• What monthly mortgage payment budget can your business support?
• If you pay yourself a regular salary, how much could you comfortably pay each month and still have enough to live on?
• Can you show at least two years of steady—or preferably growing—income from being self-employed?
• How much can you comfortably afford to use as a down payment and to cover closing costs?

Be honest with yourself in answering these questions, as the lender will require proof of the above if you choose to proceed. In particular, your debt-to-income (DTI) ratio will be central to whether the bank approves you for a mortgage, and at what cost. The standard DTI requirement is 43% or lower.

It’s also important to track your business’s finances using professional software or even a simple spreadsheet to show the lender because they will seek proof of income flows. Knowing every aspect of your business’s financial health is key to this process.

Investing time in this first step will help you determine your eligibility, nail down your price range and increase your odds of getting a mortgage faster.

2. Check Your Credit Score

Your credit score, which is based on your debt payment history, will determine if you get the loan and under what terms. The FICO score is the most commonly used metric lenders use to evaluate your risk as a borrower.

The score will typically range from 300 to more than 800—the lower your score, the higher your interest rate will be and more difficult to get approval on a mortgage. A lender will typically grade your score in the following ways:

• Exceptional: 800-850
• Very Good: 740-799
• Good: 670-739
• Fair: 580-669
• Very Poor: 300-579

You can check your credit score as often as you’d like without damaging it, as it only requires a soft credit check. Further, you can typically check your credit report once a year for free at AnnualCreditReport.com. However, each credit bureau is offering free weekly credit reports until April 20, 2022, due to Covid-19.

Owning a business should not directly impact your score, unless you took out a personal loan or line of credit. In addition, some business credit card issuers report all of your account activity to the credit bureaus.

3. Do Your Due Diligence When Choosing a Lender

Not all mortgage lenders are created equal, especially for loans to self-employed borrowers. Large traditional banks usually have strict credit standards and a rigid process for mortgages that might not suit a self-employed applicant. Online lenders might be less risk averse but demand a higher interest rate.

Consider smaller banks that specialize in mortgage lending and can offer a personalized service, rather than being at the mercy of an algorithm.

Another option is working with an experienced mortgage broker. A broker who has a history of working with the self employed can more easily guide you through the process and save you the legwork. Mortgage brokers leverage their network on your behalf, with an understanding of your unique circ*mstances to find you more lending options faster.

Mortgage Loan Options

Take the time to familiarize yourself with homebuying assistance programs sponsored by your state or local governments and federal options, especially if you are a first-time homebuyer.

Self-employed mortgage borrowers can qualify for conventional and government-backed loans. You’re more likely to get approved and have favorable loan terms if you have a good credit score, been in business for two years or more and can show reliable income. You can also qualify with a co-signer who has a high credit score.

But there are also non-traditional options to consider.

A Bank Statement Loan Geared Toward the Self-employed

The name speaks for itself. A bank statement loan is intended for self-employed borrowers who don’t have the paystubs or W-2s banks usually require. Instead, they examine your business’s bank statements (usually 12 to 24 months) to verify your net income after taxes and business expenses.

Lenders usually require a higher down payment for a bank statement loan, regardless of your credit history. It also comes with a higher interest rate to match the perceived risk of lending to someone whose income is less stable.

Required Documents for the Self-employed

Enter the mortgage application process as prepared as possible. When you apply for a mortgage as a self-employed person, in addition to the usual set of documents required, you should expect to provide the following:

• The past two years’ business and personal tax returns.
• If you received a refund for the previous tax year, a bank statement showing the deposit. If you owed taxes, a cleared check or bank statement showing the payment to the IRS.
• If your business is a partnership or S-CORP, a copy of your Schedule K-1 to show your share of its earnings.
• Proof of your self-employment and that your business exists such as: a current state or business license showing the name of the business owner, a letter from a professional organization verifying current self-employment or a signed letter from your certified accountant verifying the existence and ownership of the business.
• Your most recent business receipts or signed invoices showing the business is currently open and operating.
• A year-to-date profit and loss statement for your business, prepared by your accountant or tax preparer, accompanied by business bank statements to verify the inflows and outflows.

Tips During the Application Process

While your application is under review, it is vital not to do anything that could jeopardize your odds of success. Here are things to do and not to do.

1. Do Not Add More Debt

Do not take on any other new debt before you apply or while your application is being considered. Resist the urge to apply for that new credit card with the great miles program or buy a car. Lenders need to be certain you can repay the loan, and they will become nervous if it looks like you are piling on more debt obligations, especially if it pushes your DTI above 43%.

If possible, pay down your existing debt and limit your credit card usage to improve your DTI and keep your credit score pristine.

2. Prepare Your Down Payment

During the application process, the lender will require proof that you have the funds for the down payment, any fees and enough reserve funds to cover the first few months of mortgage payments. This is why the personal review of your financial situation discussed earlier is so important. Do not begin this journey if you cannot afford to do so based on the house or location you desire. Or be prepared to make adjustments to your expectations.

3. Be Patient

The mortgage process takes time. Do not be surprised if after submitting an initial set of documents along with your application, the lender comes back with additional requests before the loan is approved. Sometimes the process can take over a month, which might not be the same timeline as the home sellers desire. That’s why it’s so important to have as much documentation ready at the outset.

If you are not a meticulous recordkeeper, now is the time to become one. If you can’t easily access all the business and financial documents related to your self-employment and personal finances, this is the moment to rectify that.

So take the time to review your DTI. Assess your cash so you have enough for the down payment. And be prepared to provide every document possible, regardless of how cumbersome it might feel, to ensure a positive conclusion.