How To Get A Mortgage When You’re Self-Employed in 6 Steps

If you’re self-employed and looking to buy a home, you may need to take special measures to ensure you qualify for a self-employed mortgage. Here are six steps you can take to prepare for the self-employed mortgage process and boost your odds of success.

1. Determine if you need a self-employed mortgage

You can expect to be classified as a self-employed borrower if you own 25% or more of a single business, or if you work as an independent contractor or service provider. A lender will also consider you to be self-employed if you work for a company that pays you as a gig worker instead of an employee, and provides you with a 1099 for your services rather than a W-2.

How much scrutiny you receive as a self-employed borrower will depend on the lender, the type of business you run and whether you have a co-borrower. Since your income isn’t guaranteed by a traditional employment contract, a lender will ask for extra proof of income to make sure you can still afford a monthly payment. A lender may also consider you to be at higher risk of missing a payment if your earnings tend to vary from week to week. As such, it may ask for additional proof that your business is stable and that you have enough cash flow to handle a lower-earning month.

In general, a lender is likely to ask more questions about your business if:

• You receive 1099s for the income you earn instead of W-2s
• Your income shows up on the Schedule C section of tax returns
• You don’t receive a guaranteed salary from your business

2. Learn the self-employed mortgage requirements

The exact criteria you’ll need to meet to get approved for a self-employed mortgage will vary, depending on the lender. In general, you can expect to be evaluated on the financial health and viability of your business, as well as on the amount of experience you have as a business owner.

When reviewing your mortgage application, for example, a lender may consider:

• Your income stability. The lender will want to see evidence that your monthly payments are going to be consistent and predictable for as long as your mortgage is open. It may, in turn, ask for your two most recent tax returns in order to verify that your self-employment income has remained stable over time.
• How the business operates. A lender will also want to ensure that your business is financially sound. An underwriter may research the location and type of business you’re in, how much demand there is for your product and how likely your business is to stay financially strong and profitable so you can cover your expenses.
• How long you’ve been self-employed. A lender will likely want to see that you have at least two years of experience earning self-employment income — however, the approval process may be simpler if you have more experience. For example, you may be able to get away with less documentation if you’ve been in business for at least five years and can show increasing or steady earnings.
• Personal income and business income. If you’re relying on business income to help you qualify for a mortgage, then your lender will also want to see evidence that your business has a healthy cash flow and isn’t overextended. Depending on how your business is structured, you may be asked to show your business tax returns in addition to your personal returns, so your company’s losses can be compared to its profits.

3. Gather proof of your self-employed income

For example, a lender is likely to request:

• Your two most recent personal tax returns in order to demonstrate steady self-employment earnings. However, some lenders may be satisfied with just the last year’s tax return if you’ve been self-employed for at least a year.
• Your two most recent business tax returns, if applicable. The business returns you need to gather will depend on how your business is structured. The table below shows which forms you will likely need, depending on the type of business you operate:

You may not have to file a business return, though, if you’ve been in business for at least five years, your income has grown over the past two years or you aren’t using any business funds for your down payment.

A lender may also ask for:

• IRS transcripts. You may be asked to sign a Form 4506-T for the IRS so the lender can obtain a transcript of your tax return and verify that the information you provided matches what’s in the IRS database.
• Profit and loss statements. Also called a P&L for short, this financial statement shows how much total profit you’ve made after subtracting out business expenses. Lenders expect earnings on track with or higher than what you made on your tax returns.
• CPA letters. Lenders may ask your tax professional for a letter of explanation to verify your self-employment status or clarify specific details, such as your income.
• Documentation of business funds used for a down payment. If you’ve stockpiled some cash in your business accounts, you may be thinking about using some of the money to make a down payment on your home. If you do, be prepared to:
  • Get a letter from a CPA, tax lawyer or other financial professional confirming that taking the funds is unlikely to harm your business
  • Provide a copy of your business returns so the lender can look into the overall health of your company
  • Provide business bank statements to show how your balances and expenses trend over time

4. Learn how lenders calculate self-employed income for a mortgage

Most lenders analyze self-employment income based on some version of Fannie Mae’s cash flow analysis Form 1084. The method lenders use to determine your qualifying income varies, depending on whether your business is a sole proprietorship, partnership or corporation.

To decide whether you qualify for a self-employed mortgage, a lender will consider your net income — your gross income minus the costs you incur for doing business.

Note: Self-employed borrowers are sometimes confused by the term “gross income,” which is calculated somewhat differently for people who are self-employed compared to those who earn W-2 wages. For salaried or hourly workers, gross income is the amount of money that’s earned before taxes and other deductions (such as retirement contributions) are taken from a paycheck.  But if you’re self-employed, you’re responsible for your own self-employment taxes — as such, your gross income is simply the amount of money you made before taking into account expenses.

For example, if you’re a self-employed contractor, you might file an IRS form Schedule C, which asks you to deduct business expenses like advertising, utilities or office supplies from your total gross income. The amount of income you have leftover after you deduct expenses is considered your net profit or loss. This figure is what a lender uses for loan qualification purposes.

Lenders want to make sure your business is healthy — so they may also review how much debt the business is taking on and whether the income is increasing or falling from year to year. Even if a sudden drop in business income doesn’t affect your personal income, a lender could look at it as a red flag in your financial future.

5. Shop for the best company for a self-employed borrower

Some lenders for self-employed mortgages not only offer conventional loans, but also offer loans that are insured by the Federal Housing Administration (FHA) or guaranteed by the U.S. Department of Veterans Affairs (VA) or the U.S. Department of Agriculture (USDA).

However, you should ask your loan officer if they have experience underwriting self-employed income. If they don’t sound confident, you may want to compare rates from other lenders until you find someone who can confidently talk shop about self-employment.

6. Learn the alternatives to self-employed mortgage programs

If you’ve been told you don’t qualify for a traditional mortgage or don’t want the hassle of the documentation that’s required, a non-qualified mortgage (non-QM) may be worth exploring. Non-QM loans don’t meet the qualified mortgage standards set by the government, and they’re also sometimes called alternative or no income verification mortgages.

However, these aren’t the “fog-a-mirror-and-get-a-loan” products of the past — new federal laws still require non-QM lenders to verify your ability to repay the loan.

Some of the more common non-QM mortgage options are:

• Bank statement loans. With this program, lenders calculate your income based on an average of your deposits over the last 12 to 24 months of your personal or business bank statements.
• Asset depletion. High-net-worth borrowers can convert assets into qualifying income with an asset depletion loan. For example, a non-QM lender offering a 20-year fixed asset depletion loan to a borrower with a $250,000 savings account might consider the balance to be equivalent to $1,041.67 per month worth of income ($250,000 divided by 240 months equals $1,041.67).

You’ll need a bigger down payment, and you’ll also pay higher closing costs and interest rates than you would with a regular self-employed mortgage. However, a non-QM loan may bridge the gap if your tax returns aren’t acceptable to traditional lenders.