How To Get a Mortgage When You're Self-Employed

How Lenders Calculate Self-Employment Income

●    It can be harder for self-employed people to get mortgages, because mortgage lenders often see their income as less predictable when it varies from year to year. Instead of relying on pay stubs or W-2s, lenders usually review your earnings history to determine whether your income is stable and likely to continue, to lessen their lending risk. 

●    They often average your income: Many lenders calculate self-employed income by averaging your net income over the past two years. If your income has increased over time, it could strengthen your application. If it has declined, lenders may use the lower amount or ask for additional information about your business finances.

●    Net income matters most: Lenders generally focus on your net business income rather than your total revenue. That means business deductions and write-offs can lower the amount of income lenders use to determine how much you may qualify to borrow.

●    Stable income can improve your approval odds: Consistent earnings and a stable work history can help strengthen your mortgage application. Lenders may also consider factors like cash reserves, long-term clients, and experience in your industry when evaluating your financial situation.

While you might face more income verification requirements as a self-employed borrower, keeping strong financial records and maintaining steady earnings can help demonstrate that you’re ready to manage a mortgage successfully.

Can Business Deductions Hurt Your Mortgage Application?

The number of deductions you take for business expenses can affect the amount of money lenders might approve you to borrow. That’s because deductions reduce your net self-employment income, which is what lenders will mainly consider when you apply for a mortgage.

To maximize your borrowing power, you could consider claiming fewer write-offs leading up to your mortgage application so your net income appears higher on paper. Be sure to speak with a tax professional before making any changes that could affect your tax liability, and be sure not to misrepresent your disposable income

Loan Options for Self-Employed Borrowers

Different loans have different benefits and costs, but there isn’t a particular type of mortgage that’s necessarily better for self-employed borrowers. As a self-employed individual, you could apply for a:

• Conventional loan: You’ll need strong credit, steady tax returns, and usually a down payment of at least 5% of the purchase price to get a conventional mortgage.
• VA loan: Eligible veterans, active-duty service members, Reserve and National Guard members, and surviving spouses can get a VA loan — often with no down payment.
• FHA loan: Backed by the Federal Housing Administration, FHA loans allow for lower credit scores and down payments starting at 3.5%.
• USDA loan: For homes in eligible rural or suburban areas, USDA loans allow for no down payment, but you’ll have to meet income requirements.
• Jumbo loan: If you have excellent credit and can make a larger down payment, you may be able to use a jumbo loan for a home price above conforming loan limits. You must provide extensive financial documentation to demonstrate that your income can support the larger loan.
• Bank statement loan: Non-qualified (non-QM) loans, such as bank statement loans, could be a good option if you’re self-employed. That’s because they have more flexible underwriting guidelines. Which is ideal for borrowers whose income isn’t a traditional salary. However, they often have higher interest rates and require larger down payments.

No matter which loan you choose, the biggest difference between self-employed and salaried borrowers will be the amount of documentation required. But with the right preparation, you could qualify just as successfully as other borrowers.

Self-Employed Mortgage Documentation Requirements

When you apply for a mortgage as a self-employed borrower, lenders usually require more documentation than they would from someone with a traditional W-2 income. Preparing these documents ahead of time can help the approval process move more smoothly.

Common mortgage documents for self-employed borrowers include:

●    Personal and business tax returns from the past two years
●    Recent bank statements for both personal and business accounts
●    Profit and loss (P&L) statements
●    Balance sheets
●    Business licenses or proof of business ownership
●    1099 forms or client invoices
●    Proof of additional assets or savings

Some lenders may also ask for a letter from your accountant confirming your business is active and financially stable.

Keeping accurate, organized financial records can make it easier for lenders to verify your income and assess your ability to repay the loan. If your income has increased recently, providing updated financial statements may also help strengthen your application.
 

How to Boost Your Odds of Getting a Mortgage While Self-Employed

There are some steps you can take with your personal finances to improve your chances of getting approved for a mortgage.

• Build your credit score: To boost your credit score before applying for a mortgage, you can focus on reducing your credit card balances, not taking on new debts, and prioritizing on-time bill payments.
• Lower your DTI: By paying down existing loans or credit cards, you can lower your debt-to-income ratio (DTI), which can give you a better chance of meeting lender guidelines.
• Separate business expenses and personal finances: Keep separate bank accounts for your business and personal finances so lenders can clearly see your income.
• Prepare your paperwork: Having all of your documents in order when you apply for a mortgage will make the process go more smoothly, as you’re less likely to face delays when more information is needed. It’s best to provide extra details than not enough.
• Apply with a co-borrower: Adding a co-borrower with a W-2 income could give lenders more confidence in your application.
• Save for a larger down payment: The more you’re able to put down, the less risky you’ll likely appear to lenders, which could improve your approval chances.

Making your financial situation clearer and more appealing to lenders could help you more confidently secure the mortgage you need.

Refinancing When You’re Self-Employed

You can refinance your mortgage when you’re self-employed. Lenders may ask for the same type of information you provide when you apply for a purchase loan.

It can be easier for self-employed individuals to refinance their mortgages with VA or FHA loans. That’s because these loans have streamlined refinance programs that often don’t require proof of income to qualify.

Getting a Mortgage While Self-Employed FAQs

Here are answers to some frequently asked questions on how to get a mortgage when you’re self-employed.

Do Mortgage Lenders Use Gross or Net Income When You’re Self-Employed?

Lenders usually focus on your net business income, which is the amount left after business expenses. This is because net income reflects what you actually earn. While gross income gives context, net business income is what typically determines how much you can borrow as a self-employed individual.

Is It Hard To Get a Mortgage When You’re Self-Employed?

Getting a mortgage can be a bit more complex if you’re self-employed, because lenders usually see your income as less predictable. You’ll usually need to provide extra documentation, and you may face tougher credit or down payment requirements. But with preparation and clear financial records, you can qualify just like anyone else.

Can You Get a Mortgage Being Self-Employed for 1 Year?

You could get approved for a mortgage after being self-employed for just a year, but it might be more difficult. Lenders prefer to see a longer history of stable income, but if you can demonstrate other employment experience in a similar field, it might improve your odds. You could also consider a non-QM loan to take advantage of more flexible guidelines.

Final Thoughts: Getting a Mortgage While Self-Employed

Being self-employed doesn’t mean you can’t get a mortgage. It may just require a little extra preparation. By keeping clear financial records, understanding what lenders look for, and exploring the loan options available to you, you can improve your chances of approval.

Ready to see your options? Get started with Freedom Mortgage today and find the right home loan for your situation.