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

It’s no secret that the economy and workforce are changing. Right now, about 10% of the American workforce is made up of self-employed individuals. As this aspect of the workforce and economy changes, we wanted to break down what it takes for people who are self-employed, independent contractors, and business owners to get a mortgage.

 

Who is Considered ‘Self-Employed?’

What exactly qualifies as “self-employed?” Well, at least when applying for a mortgage, self-employed buyers are anyone who meets the following:

• You own 25% or more of a business
• You do not receive W-2 tax forms
• You receive 1099 tax forms
• You are a contractor or freelancer

 

What Lenders Want to See from Self-Employed Borrowers:

The good news is that self-employed borrowers have access to the same mortgage programs and rates as any other borrower in Michigan, and Treadstone can help. Self-employed borrowers are still held to the same standards as any other applicant on factors that go into your approval such as credit score, credit history, debt-to-income ratio, and your savings and assets. In general, lenders would like to see these details when reviewing your mortgage application:

• Income stability
• The location and nature of your self-employment
• The financial strength of your business
• The ability of your business to generate sufficient income in the future

 

What Documents Do You Need?

Like any mortgage application, there are several required documents. However, because you are not a traditionally employed W-2 worker, it can be more paperwork intensive to prove your net, taxable income as a self-employed individual. So, you may need to take a few additional steps and provide some extra documentation. If you plan ahead, get all of your documentation in order, and work with the right lender, getting a mortgage should be straightforward – even as a self-employed worker.

• Two years of personal tax returns
• Two years of business tax returns
• Business license
• Year-to-date profit and loss statement
• Balance sheet
• Signed CPA letter stating you are still in business
• Business bank statements

Proving Your Taxable Net Income
To qualify for a mortgage, lenders need to see at least two years of self-employed income to understand your overall financial situation. Typically, lenders average the past two years of taxable income and break it down by month to determine your net income, which is not as straight-forward as a W-2. Unfortunately, without a thorough two-year history, it can make mortgage approval trickier. Essentially, lenders want to ensure that you have stable and consistent income that is likely to continue.

Another thing to consider is that while business write-offs may help reduce your taxes, they don’t exactly do you any favors for getting a mortgage. Write-offs can reduce the income considered in the mortgage approval process, so although underwriters can add some expenses like depreciation back in to determine your net income, it can be helpful to keep business expenses separate from personal expenses to make deciphering your taxable income easier. This will give underwriters a clearer picture of your finances.

Other than your income, lenders also consider such factors as credit score, credit history, debts and debt-to-income ratio, and savings and assets, just like they do for every client, to determine your credit worthiness and ability to successfully manage a mortgage.

This all may sound daunting at first, but don’t worry — at Treadstone, we’re here to help. We have a team full of qualified mortgage experts that are happy to walk you through the mortgage process step-by-step. Get connected with one of our licensed Loan Officers today to get started!

 

Tips for Improving Your Mortgage Application as a Self-Employed Buyer

To increase your chances of mortgage approval, consider these strategies:

• Improve Your Credit Score: Pay down debts and avoid taking out new lines of credit.
• Save for a Larger Down Payment: A bigger down payment reduces your loan-to-value ratio, which can offset the risk for lenders.
• Prepare Thorough Financial Documentation: Organize your financial statements, including tax returns, profit and loss statements, and business bank statements.
• Talk to an Expert: We don’t expect you to know everything when starting your mortgage application. Talking to someone who deals with mortgages in depth on a daily basis can be an invaluable asset to your home buying journey. If you’ve got questions, don’t hesitate to ask one of our Loan Officers for help.

 

Best Mortgage Loan Options for Self-Employed Borrowers

If you’re self-employed, you may be wondering if you qualify for traditional mortgage loans. The good news is that most self-employed individuals have access to the same mortgage programs as W-2 employees. These include:

Conventional Loans
These are the most common type of loans and offer competitive rates, but typically require a credit score of at least 620.

FHA Loans
Ideal for borrowers with lower credit scores, FHA loans also allow for smaller down payments. If your credit score is under 580, an FHA loan may be an option.

VA Loans
If you’re a veteran, a VA loan could be your best option, as they often don’t require a down payment and offer favorable rates.

 

Plan Ahead to Make the Mortgage Process Easier

Because of the little bit of extra work and documentation it may take to get approved for a mortgage being self-employed, planning ahead will only make the process smoother, simpler, and better.

• When you decide to move forward with the mortgage or refinance process, contact your accountant to get the proper documentation if you don’t already have it on hand.
• Have an experienced Loan Officer in your corner from the start to guide you through the process.
• Work with a lender who specializes in mortgages (vs a banker who offers hundreds of financial products but doesn’t specialize in any 1 of them). Mortgage lenders have the infrastructure and expertise to move quickly through a self-employed borrower’s application, whereas general banks may not have as much experience.
• As with any borrower regardless of employment type, things like a larger down payment, a low debt-to-income ratio, great credit, and working with an invested Loan Officer are all beneficial as you go through the mortgage process.

Whether you are a first-time home buyer or a veteran real estate investor, don’t let your status as self-employed stop you from moving forward on your next purchase. Our team is ready and available to help you navigate the process of buying a home and securing financing as a self employed borrower.

 

Are You a Realtor Looking to Buy?

Because we work with Real Estate Agents on a daily basis, Treadstone is a great resource when those agents are looking for a mortgage of their own. Realtors may use their commission as a down payment source provided they are licensed and the property is being purchased by them! Treadstone can use your earned real estate commission as an eligible source of funds for down payment and closing costs provided your are a licensed real estate agent and will receive a sales commission from the purchase of the property. Get in touch with one of our seasoned Loan Officers to ask more questions or get started on your application!

 

FAQs

How is self-employed income calculated?
The amount you can borrow depends on your credit score, debt-to-income ratio, and averaged income from the last two years of tax returns.

Can I get a mortgage if my self-employment fluctuates?
Even if your income varies, lenders look for consistency over the past two years. If your income fluctuates significantly, you may need to provide additional documentation to prove your ability to afford the mortgage.

Can you get a joint mortgage while self-employed?
If you plan to get a joint mortgage (aka have a co-borrower), and one of the borrowers is “traditionally” employed, you may be able to leave out the self-employment income all together. If one borrower qualifies for the loan based on their income alone, you could choose not to include the self-employed borrower in the process. Find out all the options for your personal situation by talking with one of our seasoned Loan Officers!

Can I refinance my home if I’m self-employed?
Yes, self-employed individuals can refinance their mortgage. The process is similar to applying for a new mortgage, and you’ll need to provide updated tax returns and financial documents to prove your income.