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

You may be required to provide extra documentation

Reviewed by Julius MansaFact checked by Betsy PetrickReviewed by Julius MansaFact checked by Betsy Petrick

While you certainly can get a mortgage if you’re self-employed, you will likely have additional underwriting requirements to prove your income. Learn more about the application process for a self-employed home buyer, how to get a mortgage if you’re self-employed, and the pros and cons.

Key Takeaways

• Getting a mortgage if you’re self-employed will require additional documentation to verify income.
• Lenders with experience working with self-employed borrowers can help the process go more smoothly.
• Strengthening your credit, debt-to-income ratio, and down payment can help you get the best mortgage terms.

How to Apply for a Mortgage as Self-Employed

There are nearly 17 million self-employed workers in the United States, representing more than 10% of the workforce (which is about 157 million people). Despite the rising popularity of being self-employed, mortgage lenders tend to make the application process easier for W-2 employees.

Here’s a snapshot of the process; you’ll find a more detailed rundown of the steps below.

1. Determine if you’re considered self-employed by the IRS.
2. Understand the self-employed mortgage requirements.
3. Compile proof of self-employed income.
4. Determine how much of your self-employed income qualifies.
5. Shop around for a mortgage provider.

When Is It a Good Idea to Apply for a Mortgage If Self-Employed?

Carefully weigh the benefits and risks of taking out a mortgage whenever you buy a home. For self-employed buyers who want to apply for a mortgage, the pros and cons may be slightly different than for borrowers with employers.

It may be a good idea to move forward with a mortgage if:

• Your self-employment income has been steady and growing for at least two years.
• You have strong credit.
• You can put down a sizable down payment.
• You have ample cash reserves in case you have a slow period with your business.

You may want to pause your home-buying plans if:

• You just started working as an independent contractor or small business owner.
• You’re close to the DTI limit.
• You don’t have ample savings or money to put down.
• Your credit score is mediocre.

What You Need to Apply for a Mortgage as Self-Employed

In addition to the usual things you’ll need to apply for a mortgage, like having the proper ID and meeting the minimum credit score and DTI required, the lender will need to verify your employment and income. This is to make sure that you will have the ability to make your mortgage payments. 

For W-2 workers, you can provide recent paystubs and the W-2 from your last tax return. The underwriter can also contact your employer to answer a few questions about your employment history.

For self-employed people, however, these types of verifications are not available. Instead, you may be asked to provide other documentation.

Employment Verification

To verify your employment, lenders sometimes may ask for an attestation by a certified public accountant (CPA) to confirm employment for self-employed borrowers. Other requests that may come up during underwriting might be contracts that demonstrate client relationships, letters from clients, proof of business insurance, or a “doing business as” (DBA) certificate.

Income Verification

Expect to be asked for state and business licenses (if applicable) and two years of tax returns. Some lenders may ask you to fill out Internal Revenue Service Form 4506-T, which is a request for a “Transcript of Tax Return.” In addition to tax returns, business bank account statements, business profit and loss statements, 1099s, or accounts receivable can help verify income. 

Choosing a Self-Employed Mortgage Provider

When selecting a mortgage company, you should do your due diligence to ensure you get a competitive offer and a reputable lender. Here are some factors to compare when you’re shopping for a mortgage provider:

• Rates and fees: Cost is likely one of the top criteria you’ll care about when comparing lenders. Look at both interest rates and fees that impact your out-of-pocket costs.
• Customer service: You want to work with a lender that is responsive to your questions and helpful, especially if you have a more complex underwriting process because you are self-employed.
• Reputation: Read reviews of the lender online and check for any major lawsuits or red flags regarding how other customers have been treated.

Applying for a Mortgage as Self-Employed

If you’re self-employed, additional requests for documentation and lots of questions come with the territory. You may be asked to explain significant changes in income, for example. You can prepare by gathering all of your business financials and keeping meticulous records so that you can quickly respond to requests.

Determine If You’re Considered Self-Employed by the IRS

Self-employment is defined by the IRS as a situation in which someone is a sole proprietor, an independent contractor, or a partner in a business. You are not a W-2 employee with an employer. Rather you receive 1099-NEC, 1099-MISC, and/or 1099-K income.  

Understand the Self-Employed Mortgage Requirements

The main differences in mortgage requirements if you’re self-employed have to do with your income and employment. Your credit and debt-to-income ratio requirements will be the same. Because self-employed workers don’t earn a predictable salary each year, the lender will want to see two years of business and personal finance records (or tax returns) and, ideally, an upward trajectory in your income.

Compile Proof of Self-Employed Income

Proving self-employment income is a bit different than for W-2 employees. Because your income may not be steady and may come from various sources, lenders might want to see a combination of documents starting with your tax returns (usually two years’ worth). Other potential proof of income could be business account bank statements, 1099s, customer invoices or contracts, account receivables, client letters, etc.

Note

Because self-employment income fluctuates, lenders may require two years’ income. Typically, they will add up the total income from each year and then divide by 24 to get your average monthly income. 

Determine How Much of Your Self-Employed Income Qualifies

Remember that mortgage companies will look at net income rather than gross income. So while it may be beneficial from a tax perspective to write off business expenses, for mortgage application purposes, the lower income might make it more difficult to get approved for a mortgage.

Shop Around for a Mortgage Provider

Since there are so many self-employed home buyers today, most mortgage lenders should be able to accommodate you. However, when speaking to prospective lenders, ask if they have anyone who specializes in working with self-employed applicants. That can help make the underwriting process go more smoothly since they can advise you on the best types of documentation needed for approval.

Once you find a few potential lenders, get quotes and pre-approval letters to compare offers.

Review Self-Employed Mortgage Alternatives

If you are having trouble qualifying for a traditional loan program like a conventional loan or federally backed loan program, you can explore other options. For example, you could look into a bank statement loan, or you could ask someone to co-sign with you.

Frequently Asked Questions (FAQs)

How Hard Is It to Get a Mortgage if You’re Self-Employed?

Getting a mortgage if you’re self-employed isn’t necessarily harder, but the application and underwriting process will be more detailed.

How Do Self-Employed People Prove Income for a Mortgage?

Self-employed people can use a combination of documents to prove their income for a mortgage. This can include tax returns, business profit and loss statements, bank statements, 1099s, work contracts, invoices, and more.

What Is the Best Mortgage for Self-Employed People?

There is no “best” mortgage for self-employed people. Every home loan applicant must determine the best mortgage for their unique financial situation. For some, it might be the loan with the lowest interest rate. For others, it might be a loan program that allows for a lower down payment. A VA home loan might be best if you have a military affiliation.

What Do Lenders Look at on Self-Employed Tax Returns?

Mortgage lenders look at self-employed individuals’ net income to determine whether they have enough to cover their mortgage. They examine year-to-year trends for the business’s gross income, expenses, and taxable income. Mortgage companies also look for indications that income is steady or increasing over time.

Read the original article on Investopedia.