I’m Self-Employed, What Do I Need Get a Mortgage?
Buying a home is a significant milestone, but getting a mortgage as a business owner can be more challenging. Unlike traditional salaried employees, self-employed mortgage borrowers face stricter scrutiny from lenders who need assurance of their income stability.
This article provides a comprehensive guide on what self-employed individuals need to navigate the mortgage process successfully. Whether you’re a freelancer, business owner, or contractor, this guide will help you prepare for homeownership with confidence.
If you’re self-employed and ready to start the mortgage process, you can start our digital mortgage application now and explore competitive rates tailored to those who are self-employed!
How Can a Self-Employed Person Get a Mortgage?
Here is information you can use to better understand the mortgage process and prepare adequately:
What Are the Mortgage Requirements & Qualifications for a Self-Employed Person?
Here are the requirements and qualifications for self employed home loans and mortgage financing for self employed individuals:
- Income Stability: Lenders want to see that your income is stable and sufficient to cover mortgage payments. They typically require proof of consistent income over the past two years.
- Verification of Self-Employment: Unlike W-2 employees who can easily verify employment through pay stubs, you’ll need to provide alternative paperwork that provides proof of income documents for self employed individuals.
- Credit Score and Debt-to-Income Ratio: At Rate, we require a minimum credit score of 620, but having a higher score improves your chances of approval and getting a better interest rate. Your debt-to-income ratio (DTI) should ideally be below 36%, though some lenders may accept up to 43% for self-employed borrowers. If your DTI is higher than 50%, you may want to focus on reducing your debt before applying for a mortgage. To see what your personal rate could be, check our current interest rates and get your personalized rates by providing a few details.
- Cash Reserves: Lenders may require you to have additional savings to cover mortgage payments in case of business downturns. This usually ranges from 6 to 12 months’ worth of mortgage payments.
Which Documents are Required?
To prove that you meet all the requirements to acquire loans for self-employed people, you need to provide several documents to apply for a mortgage. Please keep in mind that every lender and every situation is different
Employment Verification:
- Business License: A copy of your business license to prove your business is legitimate.
- Proof of Business Insurance: to show that your business is operating professionally and is financially responsible.
- Articles of Incorporation: If your business is structured as an LLC or partnership
- State or Federal Permits: Any permits that are required for your business operations.
- CPA Letter: A letter from a certified public accountant (CPA) confirming your self-employment status.
- Client Contracts and Letters: Contracts with clients or letters from them to demonstrate ongoing and future income.
- Professional Organization Membership: Verification from a professional organization that you are a member.
- Doing Business As (DBA) Certificate: If you operate under a different name, this certificate is necessary.
- Self employment verification letter: This letter helps you verify your employment in cases where you’re applying for a mortgage and other business loans or contracts. It’s also known as a self-employment declaration letter.
Proof of Income Documents for Self Employed
- Personal and Business Tax Returns: You will need to provide two years of personal and business tax returns.
- Form 1099s and Schedule C: Your income should be reported on Form 1099s rather than W-2s. A Schedule C, used to report income or loss from a business, is also essential.
- K-1 Statements: This form is for business partnerships and is used to report on the activity of shares within partnerships.
- IRS Form 4506-T: Some lenders may ask you to fill out this form to obtain a transcript of your tax returns directly from the IRS.
- Bank Statements: Provide 12-24 months of both personal and business bank statements to demonstrate your cash flow and financial management.
- Profit and Loss Statements: Detailed statements showing your business income, expenses, and net profit.
- Balance Sheets: These show your business assets and liabilities.
- Additional Income Proof: If you have additional income sources, such as rental income, provide documentation for these as well.
Working with a CPA can help you organize these documents and present your financial situation in the best light to mortgage lenders.
How Can a Self-Employed Person Provide the Best Mortgage Application?
Here are some tips to help you put your best foot forward:
1. Keep an Eye on Your Credit
To work on your credit score:
- Pay your bills on time.
- Reduce your debt.
- Correct any errors on your credit report.
- Keep your credit utilization ratio low (the percentage of your available credit that you are using).
2. Separate Business and Personal Finances
Use separate bank accounts and credit cards for business and personal expenses. This separation helps prevent confusion and makes it easier for lenders to understand your financial situation. A business credit card also helps to establish business credit that can help build your business’s financial profile independent of your personal credit.
3. Maximize Your Down Payment
Making a larger down payment can significantly improve your mortgage application. Aim to put down at least 20% to avoid private mortgage insurance (PMI) and to increase your chances of approval and favorable interest rates.
4. Consider Alternative Loan Options
Explore other loan options if you have trouble qualifying for a conventional mortgage. Self-employed borrowers may be eligible for Federal Housing Administration (FHA) loans, which have more flexible requirements.
Additionally, if you are an eligible veteran, active-duty service member, or surviving spouse, you may qualify for a Department of Veterans Affairs (VA) loan.
5. Find a Co-Signer or Co-Borrower
If your employment status and income history hinder your mortgage approval, consider finding a co-signer or co-borrower. A co-signer with a strong credit history and sufficient income can help you qualify for a mortgage.
6. Work with an Experienced Loan Officer
Choosing a lender who understands the unique challenges of self-employed borrowers can make a significant difference.
Our loan officers at Rate are experienced in handling self employed mortgage applications and can help you present your business earnings and liabilities clearly.
7. Show Industry Stability
Demonstrate that your industry is stable and your services are in demand. Having a professional online presence and relevant certifications can enhance your credibility.
8. Use a Business Plan
A business plan and documentation showing revenue growth can support your application.
Which Types of Mortgages Make Sense for a Self-Employed Individual?
As a self-employed individual, you have access to a wide range of mortgage options. The key is to find the one that best fits your financial situation and long-term goals.
Here’s a closer look at the different types of mortgages available to self-employed borrowers and how they compare:
Minimum Down Payment Options: 3%
Credit Score Requirements: Minimum 620
Eligibility: Requires at least two years of self-employment or one year of self-employment plus two years in a comparable role.
Advantages: Lower interest rates, can avoid PMI with a 20% down payment
Consideration: Approval can be more challenging due to stricter requirements, making a strong credit history and stable income essential.
FHA Mortgages
Minimum Down Payment Options: 3.5%
Credit Score Requirements: Minimum 580
Eligibility: Requires two years of self-employment or one year of self-employment plus two years in a related role with similar income.
Advantages: More lenient credit score requirements, lower down payment options.
Consideration: Require mortgage insurance premiums (MIP) for at least 11 years, even with a 20% down payment.
VA Mortgages
Minimum Down Payment Options: 0%
Credit Score Requirements: Varies by lender
Eligibility: Available to veterans, active-duty service members, and some surviving spouses. Requires two years of self-employment or one year of self-employment plus two years in a related role.
Advantages: No down payment required, below-market interest rates.
Consideration: Must have a valid VA home loan certificate of eligibility.
USDA Mortgages
Minimum Down Payment Options: 10 - 20%
Credit Score Requirements: Minimum 640
Eligibility: Available to low-to-moderate income borrowers in eligible rural areas. Requires two years of self-employment or one year of self-employment plus two years in a related position.
Advantages: No down payment required, below-market interest rates.
Consideration: Property must be located in a USDA-eligible rural area and used as a single-family residence.
Non-QM Mortgages
Minimum Down Payment Options: 10%
Credit Score Requirements: Minimum 620 - 680
Eligibility: Designed for borrowers with irregular income who may not meet the standard qualifications for conventional loans.
Advantages: More flexible income verification criteria, making them suitable for those with high business expenses reducing taxable income.
Consideration: Typically come with higher interest rates and may require a higher down payment.
Bank Statement Mortgages
Minimum Down Payment Options: 0%
Credit Score Requirements: Minimum 620 - 680
Eligibility: Allows qualification based on cash flow rather than tax returns, suitable for those with high expenses on tax returns.
Advantages: Useful for self-employed borrowers who may not have 1-2 years of tax returns to verify income.
Consideration: Higher interest rates and fewer consumer protections due to their non-QM status.
Start the Mortgage Process with Rate Today!
If you’re self-employed and feel ready to buy a home after reading this article, don’t wait. Start your mortgage pre approval with Rate today to explore competitive rates and find competitive options for your financial situation.
At Rate, we provide personalized quotes tailored to your needs. All you have to do is begin your Digital Mortgage application online, fill out a quick form, and start your journey to getting personalized rates upon approval!
Non-QM Mortgage FAQs
1. Can I use projected future income to qualify for a mortgage?
No, lenders typically do not consider projected future income. They rely on documented past and current income to assess your ability to repay the loan. This means you need to provide proof of your income for at least the past two years. This proof can come from tax returns, profit and loss statements, and bank statements. Lenders want to see consistent and reliable income over time, as this demonstrates your ability to make regular mortgage payments.
2. Are there any specific mortgage lenders for self-employed individuals?
Yes, some lenders specialize in self-employed mortgages and understand the unique financial situations of self-employed borrowers. These lenders often offer more flexible qualification criteria and may be more willing to work with you to find a solution that fits your needs. For example, they might accept alternative documentation to verify income, such as bank statements or a CPA letter. Working with a lender experienced in self-employed mortgages can make the application process smoother and increase your chances of approval.
3. Is private mortgage insurance (PMI) required for self-employed borrowers?
PMI is required if you put down less than 20% on a conventional mortgage, regardless of your employment status or income stability. PMI protects the lender in case you default on the loan. However, once you have paid down enough of the mortgage to reach 20% equity in the home, you can request to have the PMI removed. It's important to note that FHA loans require mortgage insurance premiums (MIP) for at least 11 years, even if you put down 20% or more.
4. Can I get a mortgage if I've been self-employed for less than two years?
It's challenging but possible to get a mortgage if you've been self-employed for less than two years. Lenders generally prefer a two-year history of self-employment income, but there are exceptions. If you have a strong financial profile, a stable income history, and were previously employed in a similar role with comparable income, you might still qualify. Providing comprehensive documentation and working with a lender experienced in self-employed mortgages can help. In some cases, demonstrating strong cash reserves or a larger down payment can also improve your chances.