How to Get a Self-Employed Mortgage: Requirements and Loan Options
Being self-employed can make the homebuying process a bit more complicated, but it doesn’t take you out of the running. Getting a self-employed mortgage involves providing extra documentation and meeting stricter qualification standards than traditionally employed borrowers. Here’s what you need to know about the overall process.
- You’ll face extra scrutiny from mortgage lenders as a self-employed borrower.
- Lenders will assess your income and your business’s financial strength.
- Comparing multiple lenders and loan offers can help you find the best deal.
Self-employed mortgage requirements
Business owners, gig workers, contractors and other self-employed borrowers need to meet specific requirements to qualify for a mortgage. Lenders will evaluate various aspects of your financial situation, including:
Income
Lenders must confirm that your self-employment income is stable and that you can comfortably afford your mortgage payments.
A lender may consider you to be at a higher risk of missing mortgage payments if your income varies from month to month. That’s why some lenders ask for additional proof that your business is strong and that you have enough cash flow to handle a lower-earning month.
Debt-to-income ratio
Your debt-to-income (DTI) ratio compares your monthly income against your monthly debt payments. A lower DTI ratio signals to lenders that more of your income is available to cover your expenses. As a rule of thumb, a “good” DTI ratio is generally below 35%.
Not sure how much of your money goes toward debt? Use a DTI ratio calculator.
Credit score
A mortgage lender will review your credit report and credit score to get a sense of your overall financial situation and how well you manage debt. While minimum credit score requirements vary by lender and loan type, a higher score can help your approval odds as a self-employed borrower. Additionally, borrowers with high credit scores tend to get the best mortgage rates.
Cash reserves
Mortgage lenders may require you to have several months’ worth of cash reserves — easily accessible funds you could use to cover your mortgage payments if your business experiences a slow period. It’s a good idea to keep your business and personal finances separate, since this makes it easier for lenders to understand which assets belong to you versus your business.
Business strength
Lenders want to ensure that your business is financially sound. A mortgage underwriter may research your business type and its location, how much demand there is for your product and how likely your business is to stay financially strong and profitable.
Documents needed for a self-employed home mortgage
When applying for a self-employed mortgage, your lender may request various documents, including:
- Employment verification, like a business license and proof of business insurance.
- Proof of income, including personal tax returns and business tax returns, profit and loss statements, and bank statements.
- Assets, especially if the lender requires cash reserves.
- CPA letter, which is a letter of explanation from a certified public accountant (CPA) that verifies your self-employment status.
- IRS transcripts, to verify that the information you provided in your loan application matches what’s in the IRS database. You may need to sign IRS Form 4506-T, which authorizes your lender to obtain a transcript of your tax return.
A profit and loss statement, also called a P&L for short, is a financial statement that shows how much total profit you’ve made after subtracting your business expenses. Lenders expect these documents to show earnings similar to or higher than what you listed as income on your tax returns.
How to get a self-employed mortgage in 4 steps
1. Determine whether you need a self-employed mortgage
You’re considered a self-employed borrower if:
- You own 25% or more of a business
- You work as an independent contractor or service provider
- You work for a company that provides you with a 1099 tax form for your services rather than a W-2
- Your income shows up on the Schedule C section of tax returns (this applies to sole proprietors or entrepreneurs who own a business alone)
2. Take steps to boost your approval odds
To increase your chances of getting approved for a self-employed mortgage, consider improving your credit score by paying down debt or disputing any credit report errors. It’s also a good idea to avoid opening new credit accounts during your homebuying journey, since new inquiries can ding your credit score (and prompt additional scrutiny from lenders). Making a larger down payment or finding a cosigner can also help strengthen your application.
3. Collect the necessary documents
You may need to submit other forms in addition to the documents listed above, depending on your business ownership structure. Here’s a breakdown of common forms that lenders may request:
| Business type | Tax return forms to provide |
| Sole proprietorship | Schedule C |
| General partnership | Form 1065 |
| Limited liability company (LLC) | Form 1065 (or Schedule C if only one person owns the business) |
| C Corporation | Form 1120 |
| S Corporation | Form 1120S Schedule K-1s (to reflect your share of income) |
4. Shop around for mortgage lenders
There are many mortgage lenders for self-employed borrowers, so it comes down to finding the best fit in terms of rates, fees and overall reputation. Although it requires a bit more effort up front, shopping around can pay off in the long run. Borrowers can save an average of about $80,000 over the life of a 30-year mortgage by shopping around, according to LendingTree data.
Loan options for self-employed mortgage borrowers
Some of the most common ways to finance a mortgage as a self-employed borrower include:
- Conventional loans: Private lenders issue conventional mortgages, which aren’t government backed. These loans generally require at least a 3% down payment and a 620 credit score for approval. If your down payment is less than 20%, you’ll need to pay for private mortgage insurance (PMI).
- FHA loans: An FHA mortgage is backed by the Federal Housing Administration. These loans are a good option for borrowers with subpar credit, since you can qualify with a 500 credit score if you make a 10% down payment or a 580 score with a 3.5% down payment.
- VA loans: Another option is a VA mortgage, which is backed by the U.S. Department of Veterans Affairs and available to eligible military borrowers. These loans often don’t require a down payment and don’t have a set credit score, but most VA lenders require a minimum score of 620.
If you don’t qualify for a traditional loan, another option is a non-qualified mortgage (non-QM), also sometimes called an alternative or no-income-verification mortgage. Non-QM loans don’t meet the qualified mortgage standards set by the government. One example is a bank statement loan. With this program, lenders calculate your income based on an average of your bank deposits over the last 12 to 24 months. You can use your personal or business bank statements.
Keep in mind: If you choose a non-QM loan, you’ll have a larger down payment minimum, higher closing costs and steeper interest rates than you would with a qualified self-employed mortgage.
Frequently asked questions
In addition to meeting minimum mortgage requirements, you’ll need to provide various information and documents related to your business, including tax returns, profit and loss statements, and business licenses.
To decide whether you qualify for a self-employed mortgage, a lender will evaluate your net income — your gross income minus the costs you incur for doing business.
Mortgage lenders typically require a minimum of two years of self-employment history. Some lenders make exceptions under certain circumstances, for example, if you started a business within an industry you previously worked in.
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