How to Qualify for a Mortgage if You’re Self-Employed

Qualifying for a mortgage if you’re self-employed isn’t always easy. The good news is self-employed homebuyers have several mortgage options available right now. It will take a bit more effort to prepare, but partnering with the right mortgage advisor can help you get qualified.

Best strategy? Learn what to expect, put your documents in order, and work with a qualified mortgage expert. This post will help.

How to Qualify for a Mortgage When You’re Self-Employed

When a mortgage lender is considering a self-employed borrower, they will evaluate your financial health and the financial health of your business. Since your business is most likely your primary source of income, mortgage lenders will look at your business to evaluate risk.

In general, mortgage lenders will want to verify income, creditworthiness (credit score), and proof of self-employment. Quick side note — if you’re self-employed, qualifying for a mortgage will be easier with a low debt-to-income ratio and high cash reserves.

RELATED: HOW TO CHOOSE THE BEST MORTGAGE LENDER IF YOU’RE SELF-EMPLOYED

Are there any tips on getting a mortgage if you’re self-employed?

• Keep your credit report clean, and don’t add any new debt or loans
• Pay down your debt to improve your debt-to-income ratio
• Build up cash reserves
• Pull together your down payment (the bigger, the better)
• Get your documentation ready

Last week we blogged on how to boost your credit score in 60 days, which is a smart strategy if you’re self-employed. Similarly, pay down your debts to improve your debt-to-income ratio. Together, these improvements will make your mortgage application more attractive to mortgage lenders.

What documentation do you need to provide if you’re self-employed?

When you apply for a mortgage as a self-employed individual, you’re essentially applying for a mortgage just like anyone else. In addition, be prepared to provide the following:

• Two year’s tax returns, business and personal
• K-1 earnings statement (if a partnership or S-Corp)
• Proof of self-employment (business license, signed letter from your CPA)
• Proof of ongoing business (client contracts, recent invoices)
• Annual profit and loss statements (along with bank statements)
• Income verification (e.g., additional income, investments)

In most cases, self-employed mortgage applicants must provide additional documentation. In short, mortgage lenders want to determine if you’ll be able to pay back the mortgage. So when you’re applying for a mortgage while self-employed, the process will be faster if you have your paperwork ready.

Working with a qualified mortgage advisor who understands your goals is a smart choice. A qualified mortgage expert can recommend strategic home loan options that will save you money and help you get approved.

Top Mortgage Options for Self-Employed Borrowers

1. Conventional Loan

Conventional loans (aka conventional mortgages) are one of the most popular types of home loans. Since conventional loans are backed by private lenders (and not guaranteed by the government), they offer flexible terms to meet the custom needs of many homebuyers. Self-employed borrowers might see conventional loans as a good fit, offering lower rates and more flexibility on loan terms. If you’re self-employed with cash reserves, a high credit score, and consistent income, then a conventional mortgage could be your best option.

2. FHA Loan

The FHA loan is a government-backed mortgage insured by the Federal Housing Administration (FHA). FHA loans typically offer low-interest rates, and a low down payment (3.5%). FHA loans have flexible criteria to qualify, such as a lower credit score and low-to-moderate income requirements. However, FHA loans can take longer to get approved and are sometimes more strict in verifying income.

3. Bank Statement Loan

Bank statement loans allow homebuyers to apply for a mortgage without providing traditional documentation to prove income (such as W-2s or paystubs). Instead, mortgage lenders review 12-24 months of bank statements to confirm self-employment income.

A bank statement loan might be a good alternative if you don’t have traditional forms of documentation to verify your income or if your tax returns vary from year to year. In short, self-employed mortgage applicants who don’t have traditional forms of income verification might see bank statement home loans as a good fit. 

4. Apply for a Joint Mortgage

Applying for a joint mortgage with a family member, partner, spouse, or good friend is another option that might help you qualify for a mortgage when you’re self-employed. Learn how to qualify for a joint mortgage with friends or family which we blogged about here.

Remember that both applicants will need to provide qualifying documentation such as credit reports, proof of income, and employment verification for a joint mortgage.

Another option is to ask a friend or family member to co-sign your mortgage. They might help you qualify, but keep in mind that the cosigner will be fully responsible for the loan if you default. 

RELATED: HOW TO BUY A HOME WITH FRIENDS OR FAMILY

Summary

Qualifying for a mortgage if you’re self-employed might take a little more work, but homeownership is within reach. Be prepared to provide additional documentation to show income stability, proof of self-employment, and tax returns for at least two years.

Mortgage lenders look for consistent income, a low debt-to-income ratio, and a high credit score. So pay down your debts if needed and do what you can to increase your credit score. Most importantly, partner with an experienced mortgage advisor who understands your financial goals and has experience with self-employed homebuyers. 

Next Steps

When you’re self-employed and ready to apply for a mortgage, work with a local mortgage advisor who understands your financial situation. An experienced mortgage advisor can help you get qualified and keep the mortgage process stress-free. Whether you’ve been self-employed for decades or just a few years, we can help you save money on your mortgage.