Lenders usually offer a self-employed mortgage to qualified borrowers looking to buy a house with a more unique income situation. 

Who qualifies for a self-employed mortgage? Lenders use the term “self-employed” to refer to borrowers with a 25% or greater ownership interest in a firm. Or anyone who does not have a W-2 employment status, such as business owners, freelancers, independent contractors, sole traders, etc. 

While the process to secure a mortgage may involve some extra steps, self-employment doesn’t mean you are disqualified from getting a mortgage. 

Lenders tend to see self-employed borrowers as higher risk than others, due to the inconsistent income typical with self-employed individuals. 

But don’t worry. We’ll go over how to pass this hurdle and what mortgage options are available to self-employed borrowers. 

How are mortgages different for self-employed people?

Self-employed mortgage borrowers are eligible for the same loans as those who are “traditionally” employed. 

Although self-employed borrowers are subject to the same lending requirements as W-2 employees, the mortgage application process might be more difficult.

Lenders often worry about whether all applicants—including those who have employers —can consistently return their loans. 

But this worry is heightened with self-employed folks since revenue can fluctuate. Lenders will need to consider both the stability and profitability of your company and your income.

Documentation required for a self-employed mortgage application includes:

• Proof of employment
• Proof of income 
• Proof of business operations, such as a business website, to demonstrate the stability of your enterprise

The element that could be challenging is proving your income. 

As a business owner, contractor, freelancer or gig worker, you may need to provide more documentation than traditional W-2 workers.

But being self-employed shouldn’t prevent you from refinancing or buying a home as long as you meet loan requirements and can demonstrate continuous, reliable cash flow.

Normally, borrowers must have at least two years of self-employment income—consistent with Fannie Mae and Freddie Mac—requirements, to be accepted for a mortgage. The two-year rule does include a few exceptions, though.

In some cases, borrowers who have only been self-employed for a year can still get loans. 

For instance, if you can demonstrate a two-year track record in a related field, you might still be eligible. You must prove that your income in the new position is at least as much as in the W-2 position.

It will be much harder to get approval for a mortgage loan if you’ve been self-employed for less than a year. 

How to plan for a mortgage as a self-employed borrower

One of the most thrilling purchases you’ll ever make is buying a home. 

However, as you’re aware, purchasing a home—especially as a self-employed person— entails more than merely looking at neighborhoods or how relaxing a front porch is. 

Let’s look at how to plan for a mortgage as a self-employed person. 

Prepare before applying

It’s important to prepare before applying for a self-employed mortgage. Assessing your business and personal finances before applying for a mortgage is important. 

Carry out all research prior to application and track revenue flow. It’s crucial to keep track of your company’s finances using specialized software or a straightforward spreadsheet for the lender, who will want evidence of revenue streams. 

Understanding every facet of your company’s financial situation is essential to a mortgage application.

Track your debt-to-income (DTI ) ratio and credit score. Your DTI ratio will play a major role in whether the bank qualifies you for a mortgage and at what amount. 

A DTI ratio of 43% or below is a common lender requirement.

Spending time preparing and researching will help you to define your price range, check your eligibility and improve your chances of obtaining a mortgage quickly.

Check credit score

A higher credit score will make you a more desirable candidate for mortgage approval and qualify you for lower interest rates in any borrowing situation. 

Based on how well you’ve paid your debts in the past, your credit score will decide whether you meet the self-employed mortgage loan requirements.

FICO credit scores range from 250 to 900; the lower your score, the higher your interest rate, and the more challenging it will be to get approved for a mortgage. 

Credit score requirements, particularly for self-employed borrowers, will vary by lender. But generally, lenders will require a minimum score of 620. 

Find the right lender

To find the best self-employed mortgage options, it’s important to find the right lenders and programs. It’s advisable to get information and quotes from multiple lenders to compare. 

Your chance at approval can be improved by working with a qualified mortgage specialist, especially one who has experience with self-employed borrowers.

Different mortgage lenders have different requirements. 

Large, traditional banks frequently have stringent credit requirements and a tight mortgage application process that may not be suitable for 1099 employees.

Although they may be less risk-averse, online lenders typically charge higher interest rates. 

Think about smaller banks that focus on mortgage lending and that can provide individualized services.  

Another choice is to work with a knowledgeable mortgage broker. A broker with experience working with independent contractors can help you navigate the procedure easier and quicker.

To provide more lending possibilities, mortgage brokers use their network on your behalf and thoroughly understand your particular situation.

What documents are needed for self-employed mortgage pre-approval?

Be as prepared as you can be when applying for a mortgage to meet the self-employed loan requirements. 

Your chances of being pre-approved for a self-employed mortgage and qualifying for better rates can be significantly improved with appropriate documentation.  

To make up for not having W-2 employment income, prepare to submit prior tax returns, balance sheets and  bank statements, along with profit and loss statements instead.

Self-employed borrowers should also plan to have the following documentation available:

• Personal and corporate tax returns for the last two years
• Proof of tax refund deposit 
• Proof of payment to the IRS if you owed taxes (a cleared check or bank statement usually work)
• Additional revenue sources (alimony, Social Security, etc.)
• Copy of your Schedule K-1, which details your portion of the company’s earnings if it’s a partnership or S-CORP
• Proof of business status (business license, letters from clients, statements from your accountant, etc.)
• Most recent business invoices or signed receipts as evidence that the company is active and open
• Your accountant’s or tax preparer’s year-to-date profit and loss statement for your company, together with business bank statements, to confirm the inflows and outflows
• List of resources (savings accounts, investment accounts, etc.)
• Evidence of recent mortgage or rent payments

Can a self-employed person qualify for other types of mortgages?

Borrowers who are self-employed do not need to look for specialized lenders. Any mortgage lender will likely approve your application if you have self-employment income. 

You have the freedom to look around for the type of loan and lowinterest rate you desire.

A non-qualified mortgage (non-QM) might be an option to consider if you don’t want to deal with the headache of the necessary documents. 

Non-QM loans, also known as alternative or no income verification mortgages, don’t adhere to the qualifying mortgage requirements established by the government.

These loan programs are not dubious schemes for self-employed people. Non-QM lenders are nonetheless required by new federal legislation to confirm your ability to repay the loan.

Let’s look at a few of the more popular non-QM mortgage options.

Bank statement loans

In accordance with this method, lenders determine your income by averaging the deposits made on your personal or business bank statements over the previous 12 to 24 months.

Asset depletion

With an asset depletion loan, high-net-worth borrowers can turn their assets into admissible income.

In comparison to a standard self-employed mortgage, you’ll pay greater closing costs, a larger down payment and higher interest rates. If typical lenders reject your tax filings, a non-QM loan can fill the gap.

Get a self-employed mortgage from Compass Mortgage

Being self-employed shouldn’t stop you from getting a mortgage. 

Compass Mortgage has the expertise and experience working with 1099 employees, contractors and other self-employed borrowers. 

We can provide you with the mortgage program you need to get your dream house. 

Contact us today to learn more about self-employed mortgages.

Photo by Andrea Piacquadio