How to Get a Self-Employed Mortgage

Getting a mortgage can feel like jumping through hoops, but it can be even more daunting for self-employed individuals. Can you get a mortgage if you're self-employed? First, the good news: Yes, you can. While there's not a mortgage product called a self-employed mortgage, you can apply for the same conventional, government-backed, qualified, or non-qualified mortgage. Read on to find self-employed mortgage solutions so that you can buy a home this year. 

Understanding Self-Employed Mortgages

The fact that there aren't specific self-employed mortgages is actually good news for you. As a self-employed professional, instead of supplying pay stubs or W2s, you'll need to supply bank statements and tax returns. Instead of pay stubs, your tax returns and bank statements prove you can repay the loan. You will usually need to supply two years of tax returns and two to six months of bank statements.

Getting a mortgage when self-employed follows the same procedure as a standard mortgage. As long as you have your last two years' tax returns and can download bank statements showing savings and regular income, you should get mortgage approval —as long as you need other requirements related to debt-to-income ratio, credit score and total loan value.

How to Get a Mortgage While Self-Employed

Here are the steps to get a mortgage while you're self-employed. 

1. Determine if You’re Qualified as Self-Employed

You're considered self-employed if you receive 1099s from clients instead of W2s. Likewise, if you own a small business like a single-member LLC, you are generally considered self-employed. 

If you own a larger business and receive a salary, you may not be considered self-employed, but the following steps in applying for a mortgage could still apply to you. 

If your income appears on the Schedule C section of tax returns, you are considered a self-employed borrower. This means that sole proprietors and entrepreneurs who own a business alone or in partnership can be considered self-employed.

2. Check the Self-Employed Mortgage Requirements

Individual lender requirements vary, and requirements can vary by mortgage type. However, in general, you will need:

• Credit score: Credit score requirements vary by mortgage type. For a conventional mortgage, you'll need a credit score of 620-plus. Of course, a higher credit score can help you qualify for a mortgage.
• Debt-to-income ratio (DTI): Generally, lenders will accept a DTI of up to 43%, but a lower DTI can increase your chances of qualifying. 
• Down payment: You could qualify with a 0% down payment for USDA loans or as low as 3.5% for conventional loans. However, a higher down payment can increase the chances of approval or eliminate the need for private mortgage insurance (PMI).
• Stable income and cash flow: Lenders will consider your self-employed income and the income and cash flow of your business if you own one. 
• Additional savings: Additional savings can improve your chances of loan approval and demonstrate financial stability to lenders in case of income fluctuations.

3. Gather Proof of Your Self-Employed Income

Next, you'll need to gather the relevant proof that lenders require, this can typically be done in an hour or less. 

• Tax returns (both personal and business): You will usually need to supply the past two years' tax returns, including your personal and business returns. 
• Bank statements: You will typically be asked to provide two to three months of bank statements showing income. You must also provide proof of any savings or other assets used to qualify for the loan. 
• Profit and loss statements: If you have a P&L, a financial statement showing your business's total profit, lenders will look for documentation for proof of business income. Ideally, it should show earnings similar to or higher than the income on your tax returns.
• CPA letters: You may need a certified public accountant (CPA) to provide a letter of explanation about your self-employment status.
• IRS transcripts: If you're asked to sign IRS Form 4506-T, you authorize the lender to obtain a transcript of your tax return to verify the information you provided.

4. Find Out How Much Self-Employed Income Is Eligible for a Mortgage

The amount of self-employed income eligible for a mortgage is similar to any other mortgage application. Lenders will typically approve up to 43% DTI. For example, if your self-employed income is $80,000 ($6,666 per month), you could be approved for total mortgage payments, including PMI and insurance, up to $3,800. That's 43% of $6,666. 

If you have other debt, such as student loans, auto loans, business loans, or credit card debt, you can qualify for less. 

5. Shop Around With Different Lenders

Remember that each lender has its own policy, so shopping around and comparing rates is important. Even if one lender rejects your application, you could qualify for a mortgage with other lenders.  

6. Consider Other Mortgage Options

In addition to conventional or government-backed mortgages (USDA, FHA, and VA loans), you can consider other mortgage options with less stringent qualification requirements. This can make it easier to get a mortgage if you’re self-employed.

For example, non-qualified mortgages do not need to meet the Consumer Financial Protection Bureau (CFPB) standards. That means lenders can approve your mortgage even without the documentation for a traditional mortgage. The application process for non-qualified mortgages is similar to that for qualified mortgages, and many lenders offer both. 

Tip for Optimizing Your Application for Success

To improve the success of your mortgage application, work to get your finances in order, including:

Monitor Your Credit Regularly

A higher credit score improves your chances of mortgage approval and can help you qualify for a lower interest rate. You're entitled to a free credit report from all three credit bureaus at annualcreditreport.com. Many banks and credit card issuers also offer free credit monitoring for clients. 

Have a Reasonable Debt-to-Income Ratio

A DTI of less than 43% can help you qualify for a mortgage as a self-employed professional. If you're buying your first home and the mortgage will replace your current rental payment, that can help keep your DTI lower. To reduce DTI, you have two options: 

• Pay off debt, if you have it
• Increase your income

If you have significant debt, a side hustle, or building new income streams can help improve your DTI. 

Be Prepared to Make a Larger Down Payment

If you have higher debt or want to qualify for a mortgage without private mortgage insurance, a larger down payment can help you qualify for the loan. Likewise, a larger down payment can make the difference in a lender agreeing to approve your application, even with variable income. 

Get a Co-Signer or Co-Borrower

If your income fluctuates a lot, or you have either high debt or a low credit score, getting a co-signer or a co-borrower can help you to qualify. A co-signer only agrees to pay the mortgage if you fail to make payments, but a co-borrower is equally responsible for the loan. Lenders will also examine the co-borrower's income, debt, DTI, and credit score. A co-borrower or cosigner could be a spouse, partner, family member, or friend. 

Make Sure to Keep Personal and Business Expenses Separate

If you are a business owner, keeping personal and business expenses separate is essential to itemizing deductions and maintaining accurate business records. You should also keep separate bank accounts for the business. This can also help you clearly demonstrate the net business and personal income to lenders. 

Compare the Best Self-Employed Mortgages From Benzinga’s Top Providers

Mortgage solutions are available from Benzinga's top providers. Remember to compare lenders and offers to find the best solution for your needs!

Are Self-Employed Mortgages Difficult to Get?

Assuming you have a monthly income and a reasonable DTI, a self-employed mortgage shouldn't be more difficult than a standard mortgage. You'll want to work to improve your credit score, pay down debt, and gather the necessary documentation to prove your income. In addition, if you can't qualify on your own, a co-borrower or cosigner could help you qualify for a mortgage. 

Frequently Asked Questions