Self-Employed and Seeking a Mortgage? Here's What You Need to Know

Self-employed individuals and small business owners don’t have to be bogged down by the tedium of punching a clock, reporting to a boss, or adhering to a strict 30-minute lunch break. Instead, they enjoy unlimited income potential, certain tax benefits, and the value of owning something that is their own. In true “every rose has its thorn” fashion, securing a self-employed mortgage can be a little bit more complicated compared to the traditional “pull your pay stubs” method that buyers who are employed in a traditional full-time role experience.

 

Who Qualifies As Self-Employed?

Before diving head first into applying for a mortgage, it’s important to have a handle on both your financial status and what type of employment you have, so you can move forward with the right process and appropriate documentation. If you’re someone who works for themself rather than a traditional employer, you’ll be applying for a self-employed mortgage. Of course, the self-employment blanket covers a lot of different categories, including:

• Independent Contractors: Provide services to clients under specific contracts, often on a project-by-project basis.
• Freelancers: Handle multiple short-term projects, usually for different clients, offering flexibility and variety in their work.
• Consultants: Offer expert advice and specialized knowledge in specific fields, often working with businesses on a contract basis.
• Business Owners: Manage and operate their own companies, whether they are a small business owner or large, and are responsible for all aspects of the business.
• Gig Economy Workers: Engage in various jobs on a flexible basis, often through platforms that connect them with clients.

 

Is It Hard to Get a Home Loan If You Are Self-Employed?

It’s not necessarily difficult to obtain a self-employed mortgage, but it can be more challenging compared to the process for a full-time employee with W-2s. Because their income is considered steady, and it’s easy to verify with their tax forms, traditional employees follow a more straightforward path to securing a mortgage. On the flip side, freelancers, contractors, and other self-employed individuals might have a few more hoops to jump through when it comes to documenting their income, and getting it verified.

Lenders often require more extensive documentation — such as multiple years of tax returns, profit and loss statements, and business financials — to prove consistent income. This added scrutiny is because self-employed income can fluctuate, making lenders more cautious about approving loans. At the root, self-employed borrowers and small business owners should plan on spending a bit more time working with their lender to make sure their loan options make sense for them and for their business. This process includes financial planning and working closely with a CPA to show more income and less write offs the year before purchasing.

 

How to Prove Your Income When You’re Self Employed

As many self-employed folks and small business owners know, sometimes monthly earnings feed your bank account a four-course meal and other times they take the food right out of its mouth. Even if you’re self-employed and don’t experience those hunger pains, the possibility for fluctuation is there, causing lenders to require substantial proof of income. As such, proving your income for a self-employed mortgage involves more than just providing a couple of pay stubs.

Lenders typically require at least two years of personal and business tax returns to assess your earnings. This documentation helps demonstrate consistent income over time. In addition to tax returns, you may need to provide profit and loss statements and balance sheets to give lenders a clear picture of your business’s financial health. Some lenders might also request bank statements to verify cash flow and business stability. If your income varies significantly from year to year, be prepared to explain the fluctuations and provide additional documentation, such as contracts or client invoices, to support your income claims.

 

How to Prepare for an Approval

Mortgage loans for self-employed borrowers might be a bit more of a winding road to travel, but there are ways to optimize the route. Securing a self-employed mortgage requires more time and careful planning, starting with a consultation with your licensed mortgage lender at Treadstone. This initial step is crucial, since a mortgage expert can help you understand your specific situation and guide you through the process. Here are some key steps to consider after that consultation:

Understand and Improve Your Credit Score
Start by checking your credit score to have a clear picture of where you stand. If your score is lower than where you need it to be, focus on paying down existing debts, avoiding late payments, and limiting new credit inquiries to boost your score before applying.

Lower Your Debt-to-Income Ratio
Lenders prefer a lower Debt-to-Income (DTI) ratio, as it indicates you have more income available to manage mortgage payments. As you move into your mortgage application, your Treadstone lender will help you determine your DTI and understand whether you need to make changes.

Save Up for a Larger Down Payment
A bigger down payment can offset some of the risks lenders associate with self-employment.

Consider a Cosigner
If your income or credit history is not as strong as you’d like, a cosigner with stable income and good credit can help secure the loan. Just remember that this person will be equally responsible for the mortgage.

Lean on Your CPA
While you can’t receive tax advice from our Treadstone lenders, your CPA can help optimize your reported income to improve your mortgage application. They can guide you on what to deduct and how to present your financials in the most favorable light.

 

Loan Options for a Self-Employed Mortgage

When it comes to securing a mortgage as a self-employed individual, it’s important to explore all your loan options. Conventional Loans are a popular choice, but you might also consider FHA Loans if you’re looking for lower down payment options, or VA Loans if you’re a veteran. Each loan type has different requirements and benefits, and our Treadstone Lenders can help you determine which one best fits your unique financial situation.

At Treadstone, our team is here to guide you through every step of the process, from understanding your options to finding the best loan for your needs. Contact us today to start planning your path to homeownership.

 

FAQs

How many years of income do you need for a self-employed loan?
For a self employed mortgage, lenders typically require at least two years of consistent income documentation. This usually includes personal and business tax returns, profit and loss statements, and other financial records to verify your earnings stability.

Do self-employed people pay higher mortgage rates?
Self employed people don’t necessarily pay higher mortgage rates just because of their employment status. Many factors go into interest rates and your loan officer will walk you through how your interest rate was calculated.

Is it harder to get a home loan being self employed?
Getting a home loan can be more challenging for self employed individuals because lenders require more extensive documentation to verify consistent income. However, with careful preparation and the right guidance from our Treadstone lenders, self-employed borrowers can easily navigate the process.

Can I get a mortgage if I just became self-employed?
Getting a mortgage right after becoming self-employed can be challenging, as most lenders prefer to see at least two years of stable income history. However, exceptions may be made if you have a strong credit profile, substantial savings, or a history in the same industry before becoming self-employed. Consulting with a Treadstone mortgage professional can help you explore your options.