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

Self-Employment Means More Paperwork, Not Fewer Mortgage Options

Being your own boss comes with plenty of benefits—you can set your schedule, decide how much to charge for your work, and take on as much or as little work as you want. But it can also make the mortgage process feel more complicated.

The good news is it’s possible to get a mortgage when you’re self-employed without too much extra hassle. With the right budgeting, paperwork, and understanding of what’s required to apply, you can work toward being a self-employed homeowner.

Can You Qualify for a Mortgage if You’re Self-Employed?

You can qualify for a mortgage when you’re self-employed, but lenders may review your application with more scrutiny since your income can be less predictable than if it were from an employer.

Lenders typically require you to document two to three years of business income, and they may require you to have higher credit scores and meet overall tougher financial requirements than borrowers with salary-based incomes.

Who’s Considered Self-Employed?

Lenders consider small-business owners, freelancers, consultants, contractors, and gig workers to be self-employed. If most of your income is reported to the IRS using 1099 forms rather than W-2 forms, lenders are likely to say you’re self-employed even if some of your income is from other employment.

If you’re self-employed, the overall mortgage process is generally similar to that of a salaried employee.

How Lenders View Self-Employment Income

It can be harder for self-employed people to get mortgages, because mortgage lenders often see their income as less predictable. As a result, a lender may view someone who’s self-employed as a greater lending risk. That’s why lenders often ask for more documentation and may have stiffer credit and financial requirements.

The added documentation can help demonstrate that your income is stable and that you make enough money to afford your mortgage payments. The necessary documents can include:

• Tax returns: You’ll likely need to provide two years of business tax returns. Some lenders might ask for three years’ worth, so it might be best to have three ready.
• Proof of income: Lenders might ask for bank statements, profit-and-loss statements, balance sheets, lists of assets, sources of additional income, personal tax returns, or some combination of these.
• Proof of employment or business activity: This proof may include business licenses, letters from clients, statements from your accountant, or proof of business insurance.

Keeping your business income and personal finances separate can help lenders understand your business’s income.

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.

Are Certain Mortgages Better 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 prove your income can support the bigger loan.
• Non-QM (non-qualified mortgage) loan: 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—ideal for borrowers whose income isn’t a traditional salary.

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.

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 with VA or FHA loans to refinance their mortgages. 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 on 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.